Nikkei drops 0.5 percent, exporters stung by yen surge

TOKYO (Reuters) - Japan's Nikkei average fell 0.5 percent on Thursday, with exporters such as Canon Inc (7751.T) retreating as the yen surged to 5-month highs against the dollar the previous day on growing concerns about the health of the global economy.

The Nikkei's decline was cushioned, however, after U.S. aluminum giant Alcoa Inc (AA.N) reported a smaller-than-expected loss after the market close on Wednesday, giving a positive tone to the start of the closely-watched U.S. earnings season.

"It is mostly about the yen today. The stock market is on the backfoot as the currency not only sliced below the 94 yen threshold but went on to advance below 92 yen. This is not good news for exporters," said Yumi Nishimura, a deputy general manager at Daiwa Securities SMBC.

The benchmark Nikkei .N225 fell 49.67 points to 9,371.08. In early trade the index hit 9,307.81, its lowest level since late May, before paring some losses as the dollar rebounded above 93 yen on Thursday after sliding to a five-month low of around 91.8 yen the previous day.

The broader Topix declined 1 percent to 879.75.

Market watchers said the Nikkei's break below its 65-day moving average of around 9,400 exacerbated selling early in the session.

"From a technical viewpoint, really solid resistance for the Nikkei may not be seen until the 200-day moving average of approximately 9,000," said Yutaka Miura, a senior technical analyst at Mizuho Securities.

ENERGY-LINKED SHARES DOWN, SHIPPERS ADVANCE

Energy-linked shares fell in the wake of the continuing decline in oil, which dropped over 4 percent on Wednesday for its sixth straight day of losses.

Oil refiner and distributor Cosmo Oil Corp (5007.T) dropped 1.1 percent to 283 yen and Nippon Oil Corp (5001.T), the largest oil distributor in Japan, lost 1 percent to 488 yen. Oil and gas field developer Japan Petroleum Exploration (1662.T) fell 1.9 percent to 4,600 yen.

Shippers advanced after Nikko Citigroup lifted its rating on Mitsui O.S.K. Lines (9104.T) to "1M" from "2M," saying the stock looks undervalued, and upgraded Nippon Yusen KK (9101.T) to "2M" from "3M," saying it now looks appropriately valued.

Mitsui O.S.K. climbed 3.1 percent to 572 yen and Nippon Yusen rose 1.5 percent to 400 yen. Kawasaki Kisen Kaisha (9107.T) gained 2.2 percent to 370 yen.

The sea transport subindex .ISHIP.T climbed 2.5 percent to become the biggest gainer among the subindexes.

Among exporters, camera and office equipment maker Canon shed 1.3 percent to 2,945 yen and Toyota Motor Corp (7203.T) lost 1.7 percent to 3,410 yen. Honda Motor Co (7267.T) dropped 2.3 percent to 2,335 yen.

But Mitsubishi Motors Corp (7211.T) gained 1.2 percent to 163 yen after a newspaper said it and French carmaker Peugeot Citroen (PEUP.PA) will work together to develop and produce parts for plug-in hybrid vehicles.

Shares of Clarion Co (6796.T), a maker of car audio equipment, dropped 3.4 percent to 86 yen after the Nikkei business daily said the company is expected to post an operating loss of about 2 billion yen for the April-June quarter due to sluggish domestic sales of automotive electronics.

Trade picked up on the Tokyo exchange's first section, with 1.1 billion shares changing hands, compared with last week's morning average of 955 million.

Declining stocks outnumbered advancing ones by more than 2 to 1.

(Editing by Joseph Radford)