March 17, 2011 / 5:07 AM / 6 years ago

Japan stocks fall; yen keeps funds in bearish mood

<p>A man monitors stock prices at a securities trading firm in Shanghai March 17, 2011.Nicky Loh</p>

TOKYO (Reuters) - Japanese stocks fell on Thursday and domestic investors said they were poised to keep selling on rising yen volatility and a nuclear power plant crisis. Foreign buyers, drawn to valuations a cheap as Lebanon's, steadied the market after an early tumble.

The benchmark Nikkei average ended 1.4 percent lower at 8,962.67 points .N225, recovering from the intraday low of 8,639.56, but the yen dominated the session.

The Japanese currency slid after surging past a record peak against the dollar in illiquid, white-knuckle trading that could have been linked to the stock market slump after an earthquake and tsunami hit Japan on Friday.

The twin disasters led to overheating and fires at a nuclear power plant in Fukushima, north of Tokyo, and the release of low levels of radiation. Japan's military and power company workers were still battling on Thursday to prevent further radiation leaks.

"The market is and will remain very volatile near-term, it's very hard to trade based on any technical levels," Yutaka Shiraki, senior strategist at Mitsubishi UFJ Morgan Stanley Securities Co. "It would have probably have fallen more today even if it wasn't for the yen."

Construction stocks, expected to benefit from rebuilding efforts, gained. Exporters and companies with facilities in the disaster zone lost.

Elsewhere funds were unsure how to take positions for the longer term, especially given the risks of both a possible nuclear disaster and a yen volatility spike that has raised the prospect of Japanese intervention in the currency market.

"I can't take part in a market like this," said the manager of a medium-size fund who normally invests in hi-tech and semiconductor shares.

"Is even a coordinated intervention going to stop radiation?" he said, asking not to be identified because he was not authorized to speak to the media.

"If volatility rises after a potential intervention, we'll have more selling by investors who want to avoid risk."

Massive stock selling may have triggered the currency volatility in the first place, driving dollar/yen past peaks set in the aftermath of the Kobe earthquake 16 years ago.

Hammered by a share selloff on Monday and Tuesday, foreign banks have been scrambling to raise cash in yen to cover their leveraged equity purchases, traders said. Japanese banks have been reluctant to lend after the earthquake, worried about rapid cash withdrawals.

That forced foreign institutions to use the forwards and swaps markets to procure cash, contributing to the spike in the yen.

The yen surged as far as 76.25 per dollar. As the dollar recovered to around 79 yen, the Nikkei index also rebounded from a loss of more than 4 percent.

The Group of Seven rich nations will hold a conference call on Japan early on Friday local time (2200 GMT on Thursday), a G7 source told Reuters. Separately, Japanese Economics Minister Kaoru Yosano told Reuters market instability was not great enough to warrant coordinated currency intervention.

TEPCO TRADES

Tokyo Electric Power Co (9501.T), the operator of the stricken nuclear plant leaking radioactive material, plunged more than 60 percent from its last traded price on Friday. It was the most actively traded share on the Tokyo Stock Exchange's first section.

Big exporter stocks were the biggest drags on the Nikkei on Thursday. Power outages, a stronger yen and radioactive contamination from the Fukushima plant could cause havoc to some technology exporters with operations near the affected area.

JP Morgan analysts estimate that of the companies with factories near the plant, 150 milles north of Tokyo, Canon Inc (7751.T), Olympus (7733.T), Tokyo Electron (8035.T) and Hitachi High-technologies (8036.T) would take a big hit on operating profits if their facilities in the area had to shut down for a month.

So far this week, Canon and Olympus have outperformed the TOPIX this week, falling 8 percent, leaving them vulnerable to selling pressure.

The broader TOPIX was down 0.8 percent to 810.80 after briefly rising to positive territory .TOPX.

Nikkei futures listed in Osaka were down 0.8 percent to 8,930, trimming some losses after falling as far as 8,400 at the start of trade. Futures slid a bit more in after market trade to 8,810.

With the market regaining its footing, investors were picking up construction-related stocks. Contractor Kajima Corp was up 2.6 percent (1812.T) to 236 yen and Taiheyo Cement Corp also rose 2.6 percent to 118 yen (5233.T).

"We're seeing at least 50 billion yen orders from U.S. pension funds," said a trader at a Japanese financial institution. Other traders and brokers reported buying from foreign funds.

Trading volume fell to 4.1 billion shares, the lowest so far this week. Tuesday's volume was a record 5.8 billion shares.

Japanese stocks were trading at 0.9 times their book value, the same valuation as shares in Greece, Lithuania, Slovenia and Lebanon, according to Thomson Reuters Starmine. The Tokyo Stock Exchange had the third largest capitalization in the world last year.

Five-year CDS on Japan was quoted at 104 basis points on Thursday, roughly equal to South Korea's, but remained below the peak hit this week near 124 basis points.

Ten-year Japanese government bond futures finished the regular session down 0.02 point to 139.70, giving up gains held for most of the session. The cash 10-year JGB yield slipped 2 basis points to 1.200 percent, still higher than Tuesday's low of 1.145 percent.

Additional reporting by Masayuki Kitano in Singapore and Shinichi Saoshiro and Akiko Takeda in Tokyo, Writing by Kevin Plumberg; Editing by Kim Coghill

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