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Japanese shares fell on Wednesday after the previous day's four-percent rally, while government bond futures edged higher as investors paused to assess the economic damage from this month's earthquake and tsunami and ensuing nuclear crisis.
After optimism that conditions were slowly improving at the quake-hit nuclear plant in northeastern Japan drew foreign investors on Tuesday, investors focused on the expense of the March 11 disaster, which is expected to exceed the 10 trln yen from the Kobe earthquake in 1995.
Further radiation leaks added to anxiety as workers struggled to cool nuclear reactors on Wednesday.
The Nikkei newspaper reported the government expects total damage from the quake that hit northeast Japan to reach 15-25 trln yen ($185-310 bln).
Investors are also monitoring the impact of the quake on industrial production. Sony cut output at five more plants and Toyota Motor delayed restarting assembly lines.
"We've seen sharp volatility since the earthquake… The market is taking a close look at individual companies to see which companies would benefit from the disaster and which companies won't," said Toru Hashizume, chief investment officer at Stats Investment Management.
"Still, the general tone of the market is weak as the Nikkei should face selling pressure on rallies on views that the economiy would slow down."
The Nikkei average fell as much as 2% at one point before triming losses to stand down 1.6% at 9,455.06 points, slipping below a key support level at 9,500.
Terumo Corp fell 3.6% after the maker of disposable medical supplies cut its profit forecasts the previous day.
The broader TOPIX index fell 0.8% to 861.14. Nikkei futures traded in Osaka shed 1.8% to 9,360.
Before Wednesday, the Nikkei had risen nearly 17 percent from its March 15 low as cheap valuations attracted broad-based buyers, including foreigners.
However, the Nikkei index is still down more than 8 percent from pre-quake levels on March 11.
Reflecting the interest in Japanese stocks, data from TrimTabs Investment Research showed Japan equity ETFs sucked in $1.2 billion in the past week, the heaviest weekly inflow on record. On March 16, the daily inflow was the largest on record at $700 million.
DOLLAR BELOW 81 YEN
The dollar fell 0.2% to 80.88 yen , off last week's peak of 82.00 yen set after the world's major central banks intervened to stem a sudden surge in the Japanese currency that threatened to add to the economy's woes by making exports less competitive.
Data from the Bank of Japan showed on Tuesday the Group of Seven countries may have sold a total of around 530 bln yen on Friday, far smaller than market talk.
Japanese government bonds attracted safe-haven flows. The 10-year yield on the cash bond was down 2 basis points at 1.225%. Benchmark Japanese government 10-year bond futures rose 0.3 point to 139.70.
"Market players tried to maintain liquidity in their books last week after the disaster, but now they are starting to look the magnitude of impacts. The incident is likely to slow down Japan's economic growth, so markets are expected to factor this in," saod Akito Fukunaga, chief fixed-income strategist at RBS Securities.
