Japan stocks down 2 pct, hit by yen, economy fears

(Adds stocks, details)

By Aiko Hayashi

TOKYO, Feb 29 (Reuters) - Japan's Nikkei average fell 2.3 percent on Friday to a one-week closing low, with Sony Corp (6758.T) and other exporters taking a beating on a clouded earnings outlook after the dollar touched a three-year low against the yen.

Growing worries about the U.S. economy weighed on the Japanese market after Federal Reserve Chairman Ben Bernanke warned about the health of small U.S. banks, which hurt financial shares such as Mizuho Financial Group (8411.T).

One bright spot was Seven Bank Ltd (8410.Q), whose shares jumped 24 percent on their market debut after a $483 million IPO as subprime-rattled investors embraced the firm's low-risk model of earning fees from cash machines. [ID:nT91277]

Koichi Ogawa, a chief portfolio manager at Daiwa SB Investments, said the biggest reason for the day's fall was the strength of the yen, coupled with concerns about stagflation in the United States and higher commodity and oil prices.

"The problem is that Japan doesn't have sectors that get bought when the yen gets stronger. Instead, stocks here fall on concerns about earnings outlooks," he said.

"The Japanese economic outlook is also very weak as indicated by a series of downward earnings forecast revisions by domestic demand-reliant shares such as Aeon."

Ogawa said that while Japan needs measures to stimulate domestic demand, few investors expect such measures, putting additional pressure on the market.

As of 0615 GMT, the dollar was trading at around 104.76 yen JPY=, close to its lowest point since May 2005.

The benchmark Nikkei average .N225 fell 322.49 points to end at 13,603.02, the lowest close since Feb. 22.

The broader TOPIX index slid 2.1 percent or 28.82 points to 1,324.28.

Aeon Co Ltd (8267.T) slid 3.2 percent to 1,281 yen after the retailer said it likely fell short of its annual profit forecast due to weak sales in its home market and at its U.S. apparel unit Talbots Inc (TLB.N). [ID:nT80305]

Investors were also wary ahead of important U.S. economic data due out next week, including employment figures seen as critical in determining the health of the economy.

STRONG YEN HITS EXPORTERS

The dollar hit a three-year low versus the yen and hung near record troughs against other currencies.

A stronger currency weighs on exporters as it cuts into the value of their overseas sales when translated back into yen.

Sony lost 4.4 percent to 4,990 yen and Advantest Corp (6857.T) skidded 6.2 percent to 2,645 yen.

Automakers Honda Motor Co Ltd (7267.T) shed 3 percent to 3,260 yen and Toyota Motor Corp (7203.T) gave up 2.7 percent to 5,750 yen.

Bernanke warned that small banks that had invested heavily in real estate could collapse, renewing fears about a credit crunch. Those fears were fanned after American International Group Inc (AIG.N) posted its biggest-ever quarterly loss, hurt by a write-down of derivatives exposed to bad mortgage investments [ID:nN28546561].

Mizuho slid 6.3 percent to 446,000 yen and Mitsubishi UFJ Financial Group (8306.T) dropped 4.1 percent to 946 yen. Sumitomo Mitsui Financial Group (8316.T) fell 4.1 percent to 772,000 yen.

Shares of Seven Bank ended at 174,000 yen on the Jasdaq market for start-ups, compared with a pre-market price of 140,000 yen. The issue first traded at 168,000 yen.

"Seven Bank is completely unrelated to the subprime issue, and from that perspective it is easy for investment trusts and pension funds to choose this stock," said Shigemi Nonaka, a special adviser at Polestar Investment Management.

"It should be able to grow steadily over the long term."

Property shares tumbled on the gloomy economic outlook, with the property subindex .IRLTY.T down 4.5 percent, the biggest drop among the subindices.

Property developer Mitsubishi Estate (8802.T) lost 4.4 percent to 2,610 yen and Sumitomo Realty & Development Co Ltd (8830.T) was down 6.4 percent at 1,828 yen.

Trade was moderate on the Tokyo exchange's first section with 2 billion shares changing hands, compared with last week's daily average of 2.2 billion shares.

Declining stocks outnumbered advancing ones by a ratio of nearly six to one. (Additional reporting by Nathan Layne) (Reporting by Aiko Hayashi)