Japan's Nikkei posts biggest monthly fall in 2 years

* Nikkei drops 1.1 pct to hit a 4-1/2-month closing low
* Topix set for worst weekly losing run since 1975
* Yen strengthens on back of euro zone crisis; exporters hit
* Power companies surge after PM hints nuclear plants to
restart

By Dominic Lau
TOKYO, May 31 (Reuters) - Japan's Nikkei share average shed
1.1 percent on Thursday, closing out its worst monthly fall in
two years as investors cut exposure to risky assets on deepening
concerns over Spain and its banking sector, with exporters
taking a beating.
The Nikkei fell 90.46 points to 8,542.73, cutting
earlier losses amid talk from traders that the Bank of Japan was
buying exchange-traded funds in the afternoon to support the
market.
Still, the benchmark hit a 4-1/2-month closing low and was
down 10.3 percent in May, its biggest one-month fall since May
2010, when it lost 11.7 percent.
"A slight sense of panic emerged last night in the U.S.
market with stocks being sold off and investors buying bonds and
yen," said Kenichi Hirano, operating officer at Tachibana
Securities.
"If the speed of that selling is curbed we should see
short-covering and investors buying stocks back, or even new
investments."
Technical indicators showed the Nikkei could be ripe for a
rebound, as it is back in "oversold" territory, with its 14-day
relative strength index at 29.8. The short-selling ratio has
reached 28.3 percent so far in May, its highest since August
2002 and within the range of 28 to 30 percent when
short-covering tends to emerge.
A poll of 12 Japan-based institutional investors showed the
average weighting for domestic equities jumped to 37.1 percent
from 30.8 percent last month, benefiting as Europe's deepening
debt woes reduced the appeal of Uk and emerging market equities.
By contrast, a year ago Japanese stocks accounted for only
about a quarter of their equity portfolios.
Foreign investors were downbeat, however. Data from the
Ministry of Finance showed foreign investors sold a net 112.7
billion yen ($1.43 billion) of Japanese stocks last week, the
sixth straight week of net selling.
Exporters with high exposure to Europe were battered on
Thursday, with Canon Inc off 3.5 percent and Mazda
Motor Corp shedding 3.9 percent.
"We are at the mercy of macro events," said Stefan Worrall,
director of equity cash sales at Credit Suisse in Tokyo.
"If we go below that dollar/yen level (before the BOJ
unexpectedly eased policy on Feb. 14), it will be very difficult
for the Nikkei when the yen is strengthening aggressively." The
yen hit a 3-1/2-month high against the dollar.

UTILITIES POWER UP
Power utilities outperformed, however, after Prime Minister
Yoshihiko Noda said on Wednesday it was necessary to restart
idled nuclear reactors that have been confirmed safe to avoid a
summer power crunch.
Chubu Electric Power Co led the pack, surging 6.4
percent, while Kansai Electric Power Co, Shikoku
Electric Power Co and Hokkaido Electric Power Co
climbed between 3.2 and 5.8 percent.
The broader Topix shed 0.6 percent to 719.49. The
index is down 0.4 percent this week, and if it were to end the
week lower, it would mark its worst weekly losing run since
1975.
The recent sell-off has taken the Topix's 12-month forward
price-to-earnings ratio to 10.9, a level not seen since November
2008, data from Thomson Reuters Datastream showed.
"In an absolute worst-case scenario the uncertainty
surrounding the euro zone's future could trigger another
financial panic and push the Nikkei down to 7,500," Hirano said.
"That would bring its average price-to-earnings ratio from 11
now to about 9.5, the same as after the Lehman shock in 2008."
Trading volume on the main board hit a 2-1/2-month high,
with 2.31 billion shares changing hands, up from Wednesday's
1.62 billion shares and last week's average of 1.66 billion.

BET ON BANKS
Nomura Holdings, Japan's top investment bank, fell
1.9 percent, partly damaged by fears of contagion from Spain's
ailing banks and an insider trading scandal. The banking
sector fared better, easing 0.6 percent.
Naoki Kamiyama, chief equity strategist at Deutsche Bank,
was upbeat on Japanese banks, saying they had been battered by
the euro zone crisis even though they had no or little exposure
to Greece and other highly indebted European countries.
"I'm positive on financials at this moment for sector
allocation. Financials include banks and real estate," said
Naoki Kamiyama, chief equity strategist at Deutsche Bank.
"This is a kind of value situation because of the European
financial turmoil, which is not fundamentally affecting Japanese
banks. It's just cheap. It's just a sentiment driven issue."
The banking sector carried a 12-month forward P/E
of 7.64, much cheaper than the Topix, Datastream data showed.