Nikkei drops on Italy election deadlock; selling eases as yen's gains pause

Mon Feb 25, 2013 10:23pm EST

* Euro-sensitive stocks bear brunt of selling
    * 25-day MA of 11,144.65 short-term support - analyst
    * Major local, overseas events this week may lead to
volatility

    By Ayai Tomisawa
    TOKYO, Feb 26 (Reuters) - Japan's Nikkei share average
dropped on Tuesday, as the yen rose on uncertainty following the
Italian elections, but losses were  contained by expectations
the government will this week nominate an aggressive monetary
easing advocate as the new central bank governor. 
    The Nikkei dropped 1.4 percent to 11,502.30 by the
midday break after falling as much as 2.5 percent in early
trade. The index has retreated from 11,662.52 marked on Monday,
its highest level since late September 2008.
    Traders said that selling seems to have run its course for
Tuesday as the yen's rise paused.
    The euro fell to as low as 118.74 yen as a strong
showing in Italian elections by groups opposed to the country's
economic reforms triggered worry that Europe's debt problems
could once again destabilize the global economy. It last traded
at 120.71 yen.
    The dollar, which tumbled to as low as 90.85 yen, its lowest
in nearly a month, traded at 92.56 yen by the midday break.
    "The dollar's breaching the 91 yen level startled the market
and triggered a big sell-off. But the market overly reacted to
the rising yen, so investors are buying back," said Hiroyuki
Fukunaga, chief executive of Investrust.     
    Italy's centre-left coalition holds a slim lead over former
Prime Minister Silvio Berlusconi's centre-right bloc in the
election for the lower house of parliament, three TV projections
indicated. But any government must also command a majority in
the Senate, a race that is decided by region. 
    Sony Corp, Ricoh Co and Nikon Corp
, which have relatively big exposure to the euro zone
economy, underperformed and dropped between 2.3 percent to 2.4
percent.
    Toshihiko Matsuno, a senior strategist at SMBC Friend
Securities, said investors are worried about a hung parliament
in Italy, and there are fears that the country may have to
return to the polls in a short-period of time.
    Matsuno said the Nikkei's support line is seen at its 25-day
moving average of 11,144.65 for this week.
    By the midday break, the broader Topix dropped 0.6
percent to 974.42.
    
    MAJOR EVENTS THIS WEEK 
    In Japan, investors cheered news on Monday that the
government was likely to nominate Asian Development Bank
President Haruhiko Kuroda, an advocate of aggressive monetary
easing, as its next central bank governor.
    Analysts said that while the Japanese market is unlikely to
be immune from euro-zone problems in the short run, expectations
that Prime Minister Shinzo will continue to pursue bold policies
to reignite the economy is supporting long-term investors'
appetite for Japanese stocks.    
    "A negative impact (from Europe's problems) to the Japanese
market is unavoidable for now, but hopes for Abenomics have not
changed," said Takuya Takahashi, a strategist at Daiwa
Securities.
    Investors also await testimony later in the day from Federal
Reserve Chairman Ben Bernanke for further clues of when the Fed
intends to slow down or stop its bond-buying programme.
    "The Japanese market may see some volatility on sensitive
overseas news and headlines regarding the nomination of a new
Bank Of Japan governor this week," Investrust's Fukunaga said.
    Sources said the government is likely to nominate Kuroda and
two deputies this week for parliamentary approval, and it is
also lining up Kikuo Iwata, an academic who advocates unorthodox
monetary easing steps, and BOJ Executive Director Hiroshi
Nakaso, who now oversees the central bank's international
operations, as deputy governors.
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