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Nikkei falls below 7,000 as banks hit hard again

TOKYO - Japan's Nikkei average fell 1 percent on Tuesday, paring losses after slipping below 7,000 for the first time in 26 years, as Mitsubishi UFJ Financial Group and other large banks tumbled on worries about capital raising.

Canon Inc slid after it posted a 26 percent drop in quarterly operating profit and cut its annual outlook, underlining growing fears about the global economic slowdown as the Japanese corporate earnings season kicks into higher gear. Although the yen relinquished some gains made on Monday, exporters continued to be pressured by its relative strength near 13-year peaks against the dollar and levels not seen since 2002 against the euro.

Market participants also said the growing investor allergy towards equities was a major problem.

"The dollar is weak and people are worried about results, but the worst thing we're seeing today is selling by foreign hedge funds and a definite global desire to switch to cash," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"It's hard to see an end to this selling, making it difficult to gauge where the market will bottom out. But current levels are not logical, especially if you consider valuations."

The benchmark Nikkei at one point fell as far as 6,994.90, its lowest since 1982, before ending a morning of moderately active trade down 67.76 at 7,095.14. At one point it had lost over 2 percent.

The broader Topix was down 2.4 percent to 728.22 after falling 3 percent earlier.

"The strong yen is having quite an impact, and concern is growing about company earnings -- just look at Canon -- though to an extent this is factored in," said Yumi Nishimura, deputy general manager of investment advisory at Daiwa Securities SMBC.

"You can talk as much as you like about valuation and the Nikkei now being cheap, but investors are just too nervous to buy amid worry about the future."

A raft of economic events, including a U.S. Federal Reserve meeting, is likely to keep some investors sidelined, with attention on company results due out later in the day.

Honda Motor Co and Panasonic Corp are both due to announce first-half earnings after the close.

Battered Banks

Banks were among the biggest sufferers after Mitsubishi UFJ said on Monday it would raise up to $10.6 billion by issuing common stock and preferred shares.

Media reports have said that Mizuho Financial Group and No. 3 Sumitomo Mitsui Financial Group also plan to beef up their capital bases.

"This is very disappointing, but when you have a global recession and stocks fall, a capital increase becomes necessary," said Daiwa SB's Ogawa, though he said that compared to their overseas peers, Japanese banks are still fairly healthy.

Mizuho Financial lost 17.3 percent to 190,200 yen and Mitsubishi UFJ fell 15.1 percent to 495 yen. Sumitomo Mitsui was untraded due to a glut of sell orders at 335,000 yen, down 13 percent from Monday's close.

The banking subindex IBNKS.lost 9.8 percent and has lost a fifth of its value so far this week.

Tech shares lost ground as well, with Kyocera Corp down 4 percent to 4,530 yen and Tokyo Electron Ltd down 3.3 percent at 2,480 yen. Canon shed 4.6 percent to 2,265 yen. However, recently battered automakers gained, with Honda Motor Corp gaining 4.1 percent to 1,886 yen and Toyota Motor Corp edging up 0.2 percent to 2,945 yen. Trade picked up on the Tokyo exchange's first section, with 1.26 billion shares changing hands, compared with last week's morning average of 986.5 million.

Declining stocks outpaced advancing ones by nearly 3 to 1.