Japan's broad-based Topix index fell to its lowest close in 19 months on Tuesday as the yen's strength against the dollar hurt shares of exporters such as automakers, while weakness in financial shares weighed on confidence.
The benchmark Nikkei average hit a seven-week low but analysts said the Topix has been hit particularly hard by a downbeat performance in the banking sector on worries about stricter global banking regulations, and by a series of equity financings including defensive stocks such as Tokyo Electric Power Co.
Top lender Mitsubishi UFJ Financial Group posted its lowest close since April 2003, while Sumitomo Mitsui Financial Group, Japan's No. 3 bank, hit its lowest in about seven years, before recouping ground to end the day slightly higher.
So far this year the Topix has lost nearly 12%, roughly in line with MSCI Japan. That compares with a gain by the Standard & Poor's 500 Index of about 6% in the same period, and a rise by the MSCI index of Asia-Pacific stocks outside Japan of about 13%.
"What's triggered the recent selling of Japanese stocks is not really worries about the economy or earnings. Rather, it's the strong yen and a number of equity financings including those by companies that had been considered 'defensive' stocks," said Soichiro Monji, chief strategist at Daiwa SB Investments.
"But the Nikkei has held above its September lows, helped by stronger earnings by electronics makers and other exporters that have heavier weight on the benchmark."
The Topix ended the day down 0.02% at 803.12, its lowest finish since April 2009.
The benchmark Nikkei added 0.1% to 9,159.98, after falling as low as 9,123.62, its lowest intraday level since September 9.
"Japanese banking shares are also pressured by Basel, as they are part of the global banking sector," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
"With uncertainty over the outlook for European banking shares remaining, it may be inevitable that those shares are taken out of portfolios."
Under new global banking regulations proposed last month, known as Basel III, banks will be required to hold top-quality capital worth at least 7% of their risk-bearing assets — more than three times current requirements.
Overseas investors have been only tepid buyers of Japanese equities over the past few months, having bought a net 40.8 bln yen ($506.6 mln) in Japanese shares from late August until late October, according to the Ministry of Finance's weekly capital flows data.
Tetsuro Miyachi, a senior portfolio manager for Franklin Templeton Investments Japan, said a perception that the Bank of Japan's monetary easing had been insufficient and frequent changes in Japan's prime minister were likely contributing to overseas investors' lack of enthusiasm for Japanese shares.
He said overseas investors' subdued investment in Japanese shares may persist for another year or two.
On Tuesday the overall mood remained cautious, with many investors seen reluctant to take fresh positions before the outcome of the Federal Reserve's meeting on November 2-3 and U.S. midterm elections, and as Japanese markets will be closed on Wednesday for a national holiday.
The dollar was trading at 80.65 yen, near a postwar historic low of 79.75 yen marked in April 1995.
BANKS HIT MULTI-YEAR LOWS
Japan's banking subindex has underperformed the overall market so far this year, falling about 18%, also as uncertainty over battered consumer finance businesses and weak loan demand have cast a pall over the banking industry's long-term prospects.
Mitsubishi UFJ Financial Group finished the day flat at 367 yen, and Sumitomo Mitsui Financial Group lost as much as 1.5% before ending up 0.5% at 2,372 yen.
Second-ranked Mizuho Financial Group also ended flat at 116 yen, after falling as much as 1.7% at one stage.
Among exporters, Honda Motor Co lost 2.3% to 2,725 yen and Mazda Motor Corp fell 1% to 202 yen. Sony Corp slipped 0.9% to 2,627 yen and Advantest fell 1.3% to 1,474 yen.
Elpida Memory dropped 5.1% to 764 yen after saying it expects a quarterly profit well short of the market consensus as slowing PC demand pushes down DRAM chip prices and a stronger yen eats into the Japanese PC memory makers' earnings.
Trade slowed on the Tokyo exchange's first section, with 1.55 bln shares changing hands, its lowest in a week.
