Nikkei 2008 outlook downgraded, hit by yen surge

TOKYO (Reuters) - Japanese share prices are expected to show an overall loss this year as U.S. economic worries, a stronger yen and high raw materials costs hit export-dependent corporate profits, according to a Reuters poll of analysts.

The benchmark Nikkei average .N225 is forecast to end 2008 at 14,000, down 8.5 percent on the year, according to the median forecast of 19 equity analysts and investment managers polled during the period March 10-14.

That is significantly lower than the 17,225 level for the Nikkei that analysts had predicted just three months ago, when many had expected the worst would be over the global market turmoil in the first half of the year.

All 19 predictions were below December's median forecast, with 10 below 15,000 -- the lowest in the previous poll.

The forecasts were taken before JPMorgan Chase bought ailing investment bank Bear Stearns at the weekend and the U.S. Federal Reserve extended lending directly to securities firms for the first time since the Great Depression.

The latest forecast indicates a 17 percent gain from Tuesday's close of 11,964.16 -- which was just above Monday's 2-1/2 year low.

But now few participants have an end in sight for the credit market turmoil stemming from the U.S. subprime loan problems.

Worse, the yen's sharp gains against the dollar has led many to predict the Tokyo market will suffer a further fall when companies give their profit outlooks for the business year starting on April 1.

"For Japanese stocks the worst will come in May, when corporate guidances for the 2008/09 business year are out," said Naoki Kamiyama, managing director at Morgan Stanley Japan Securities. "Companies are likely to be pretty conservative in their estimates."

Japanese companies have enjoyed a five-year run of record profits, thanks to leaner operations and global economic growth, but that is seen coming to a halt next business year.

During last week when the poll was conducted the dollar dropped below 100 yen for the first time in 12 years amid doubts about the effectiveness of the U.S. Federal Reserve's efforts to aid strained credit markets and limit damage to the U.S. economy. The dollar fell below 96 yen on Monday.

"It is almost certain now that Japanese companies will see profits decline in 2008 given the double impact of the stronger yen and high raw materials costs," said Takeshi Osawa, a senior fund manager at Norinchukin Zenkyoren Asset Management, who sees the Nikkei bottoming at around 10,000 around mid-2008.

With cost-cutting efforts and moving manufacturing bases overseas, many Japanese firms have increased their ability to cope with a stronger yen, but see a dollar rate below 100 yen eating into their profits.

Some market participants expect the stock market to be back on a mild recovery path in the second half of 2008, lifted by growing expectations that the U.S. government will take bolder action to protect financial markets.

But the Nikkei is likely to continue to lag.

"Given weak domestic demand, the Japanese market will be able to see only half the gains of U.S. and European markets," said Morgan Stanley's Kamiyama. "But when it goes down, it dives deeper than others, hit by the stronger yen."

(Editing by Greg Mahlich)