Japan Nikkei down over 2%, hit by inflation worries

(Updates to midmorning)

TOKYO, June 12 (Reuters) - Japan's Nikkei stock average fell over 2 percent to a two-week low on Thursday, hit by growing inflation worries that sent Canon Inc (7751.T) and other exporters sharply lower. Banks slid after their U.S. peers fell on fresh signs of trouble in the financial sector, while both property developers and shippers extended recent losses.

One of the few bright spots was drugmaker Daiichi Sankyo Co (4568.T), which kept gains after saying on Wednesday it would take majority control of India's biggest drugmaker, Ranbaxy Laboratories Ltd (RANB.BO), in a friendly deal worth up to $4.6 billion. [ID:nT347557]

"Until now Tokyo didn't fall sharply even when Wall Street did, since there was a perception that Tokyo stocks were invulnerable to inflation," said Masayoshi Okamoto, head of dealing at Jujiya Securities. "But with stagflation worries growing in the world it isn't a good time to hold stocks, especially now that Japan itself seems to be seeing inflation."

Though Japan is unlikely to experience textbook 1970s-style stagflation, worries are growing, he added.

"With Japan in a deflationary situation for ten years, consumers began to think that falling prices were the norm, so that even the comparatively small price rises we're seeing now have an impact equivalent to much larger ones in the U.S."

The Nikkei .N225 fell 2.2 percent, shedding over 300 points to 13,871.73, its lowest in two weeks. The broader Topix was down 2 percent at 1,361.87.

Exporters slid, partly due to a slightly stronger yen but even more due to worries about the U.S. economy, Okamoto added.

"The U.S. economy isn't good, so even if you export things there, they won't sell," he said.

Canon slid 3.8 percent to 5,310 yen, Honda Motor Corp (7267.T) was down 3.2 percent at 3,680 yen and Sony Corp (6758.T) shed 3 percent to 5,120 yen.

Banks slid after the Financial Times said Lehman Brothers LEH.N may look to raise more capital, renewing worries about the U.S. financial sector.

Number 2 bank Mizuho Financial Group (8411.T) lost 2.9 percent to 533,000 yen, No.3 bank Sumitomo Mitsui Financial Group (8316.T) was down 2.7 percent at 866,000 yen and top lender Mitsubishi UFJ Financial Group (8306.T) fell 1.3 percent to 1,042 yen.

Property shares such as Mitsubishi Estate Co Ltd (8802.T), Japan's second-ranked real estate developer, weighed on the market due to worries about a future interest rate hike in the face of inflation.

Mitsubishi Estate was down 3.5 percent at 2,465 yen, while top developer Mitsui Fudosan Co Ltd (8801.T) slid 3.2 percent to 2,270 yen.

Kawasaki Kisen (9107.T) and other shipping companies slipped after key freight rates slid, with the Baltic Dry Index .BADI falling 2.7 percent. Kawasaki Kisen fell 5.1 percent to 1,040 yen and Mitsui OSK Lines Ltd (9104.T) sank 4.6 percent to 1,443 yen. (Reporting by Elaine Lies, editing by Brent Kininmont)