Nikkei down 0.8% on property firms, Yahoo stumbles

(Adds trade volume, details)

By Aiko Hayashi

TOKYO, May 20 (Reuters) - Japan's Nikkei stock average slipped 0.8 percent on Tuesday, dragged down by property firms after a brokerage downgrade, while exporters such as Kyocera Corp (6971.T) came under pressure from a firmer yen.

Yahoo Japan (4689.T) fell 4 percent after a source told Reuters that Microsoft Corp (MSFT.O) has proposed buying Yahoo Inc's (YHOO.O) search business but not Yahoo Japan. [ID:nN19435039]

But steelmakers were bought after Nippon Steel Corp (5401.T), the world's second-biggest steelmaker, said it expects customers to let it hike prices by more than a third [ID:nT357493], while trading houses benefited from higher commodity prices after oil topped $127 a barrel.

Property firms slid after Credit Suisse downgraded the sector to "underweight" from "market weight", saying bank lending to the real estate industry continues to slow.

"In addition to the downgrade, it's inevitable that property firms adjust levels because they had risen considerably irrespective of their fundamentals," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"The overall market also has been overbought in terms of technicals, with the up-down ratio standing at 129, while stocks aren't cheap if you look at valuations," he said.

Up-down ratio levels above 120 generally indicate that the market is overheated.

The benchmark Nikkei average .N225 fell 109.52 points to finish at 14,160.09. The broader Topix index shed 0.3 percent or 4.41 points to 1,399.84.

The dollar fell 0.4 percent against the yen from late U.S. trading on Monday to 103.97 yen JPY=.

"The yen trading at the 103 level prompted profit-taking after a rise in U.S stocks and a softer yen supported the recent rise in the Japanese market," said Yutaka Miura, deputy manager of the equity information department at Shinko Securities.

Daiwa SB's Ogawa warned that while higher oil prices benefit energy-related shares, the trend is negative for a majority of companies in terms of earnings and could hurt the economy.

"If oil prices were to keep rising, gains in the market would be capped," he said.

PROPERTY SHARES HIT

Shares of Sumitomo Realty & Development Co Ltd (8830.T) shed 4.7 percent to 2,620 yen, Mitsubishi Estate Co Ltd (8802.T) gave up 3.6 percent to 2,790 yen and Mitsui Fudosan Co Ltd (8801.T) lost 2.4 percent to 2,660 yen.

Yahoo Japan fell to 43,300 yen after Reuters reported that, according to a person familiar with the talks, Microsoft has proposed buying Yahoo Inc's search business and taking a minority stake in the Web pioneer, stopping short of a full-out merger.

As part of the deal Yahoo would put its Asian assets, including significant minority stakes in Yahoo Japan (4689.T) and China's Alibaba Group, up for sale, the source said.

Shares of electronics maker Kyocera fell 2.4 percent to 10,030 yen and Advantest Corp (6857.T), the world's largest maker of microchip testers, skidded 4.5 percent to 2,745 yen.

Credit Suisse also upgraded the steel sector to "overweight" from "market weight".

"With global steel stocks having rallied following the rise in steel spot prices, we believe it is now the turn of Japanese steel stocks to stage a rally," Credit Suisse analyst Shinya Yamada wrote in a note to clients.

Nippon Steel climbed 2 percent to 703 yen and JFE Holdings Inc (5411.T) added 2.7 percent to 6,400 yen.

Trading houses gained after oil topped $127 a barrel and gold ended up above $900 on Monday. Strong commodity markets benefit Japan's top trading firms -- all of which invest heavily in overseas oil fields and mines. [O/R] [GOL/]

Mitsubishi Corp (8058.T) gained 1.6 percent to 3,930 yen to book its highest price this year, while Sumitomo Corp (8053.T) rose 3.1 percent to 1,620 yen.

Trade picked up on the Tokyo exchange's first section, with 2.4 billion shares changing hands, compared to last week's daily average of 2.1 billion.

Declining stocks beat advancers by 923 to 681. (Editing by Brent Kininmont)