May 7, 2014 / 2:15 AM / in 4 years

Nikkei drops to 3-week low, hit by strong yen and Ukraine concerns

* Service firms' business activity hurt by sales tax hike -
    * Investors brace for slowdown in corporate profits -
    * Index heavyweight Fast Retailing hits lowest since

    By Ayai Tomisawa
    TOKYO, May 7 (Reuters) - Japan's Nikkei share average
tumbled to a three-week low on Wednesday as a stronger yen
dragged down exporters and ongoing concerns about Ukraine hurt
market sentiment.
    The Nikkei was down 2 percent at 14,170.48 in midmorning
trade after falling as low as 14,160.08, its lowest since April
16. Last Friday, the index shed 0.2 percent to 14,457.51.
    Investors returned from a four-day Golden Week holiday to
find the dollar had slipped to a three-week low of 101.49 yen
    Traders were also keeping an eye on developments in Ukraine,
where supporters of Russia and of a united Ukraine are accusing
each other of tearing the country apart. The former Soviet
republic is sliding towards war. 
    "The current weak Japanese market is not just due to
external factors," said Takatoshi Itoshima, chief portfolio
manager at Commons Asset Management. "Investors are bracing for
weaker-than-expected growth for this fiscal year mainly because
of the dollar-yen levels. If companies don't have a weak yen
buffer, how can they expect growth?"
    He said that although analysts had expected Japanese
companies would see a 10-15 percent rise in their operating
profits during the fiscal year through March 2015, they recently
cut their growth projections to around 0-5 percent.
    Dwindling expectations of fresh stimulus from the Bank of
Japan have also weighed on sentiment. BOJ Governor Haruhiko
Kuroda has repeatedly insisted in recent weeks that the economy
can weather the impact of the sales tax hike that took effect
last month.
    "Although Kuroda downplays the effect of the tax hike,
investors don't seem convinced," said Norihiro Fujito, senior
investment strategist at Mitsubishi UFJ Morgan Stanley
    According to Markit, Japanese service companies reported a
fall in business activity in April, while new business declined
for the first time in nine months due to the rise in the sales
tax to 8 percent from 5 percent.
    The headline seasonally adjusted Business Activity Index
decreased to 46.4 from 52.2 in March, below the 50 threshold
that separates expansion from contraction.
    "This is hitting foreign investors' sentiment," Fujito said.
"The combination of a strong yen and weak business sentiment is
strong enough to drag down bellwether exporters like Toyota and
    Toyota Motor Corp, which is scheduled to announce
its full-year earnings this week, shed 0.9 percent and was the
third-most traded stock by turnover. Honda Motor Co 
dropped 2.9 percent.
    Index heavyweight stocks also underperformed. SoftBank Corp
 slipped 2.1 percent and was the most traded stock by
turnover, while Fast Retailing Co dropped 1.9 percent
to 31,420 yen, its lowest since November.
    The broader Topix fell 1.9 percent to 1,159.72 while
the new JPX-Nikkei Index 400 dropped 1.9 percent to

 (Editing by Chris Gallagher)
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