* Yen hits new 4-month low vs dollar *
Tokyo stocks fell on Friday, losing ground for a third straight day as the deadlock over raising the U.S. debt ceiling pushed the yen higher while Nintendo plunged as much as 20% on a crumbling earnings outlook.
Shares of Nintendo, a non-Nikkei component but around 40% held by foreign shareholders, hit their lowest level since May 2004.
But overall, the market was underpinned by hopes that the focus will shift back to the post-earthquake earnings recoveries being staged by many Japanese companies as long as U.S. lawmakers reach some sort of compromise by early next week.
"The market is somewhat optimistic that the U.S. will have a good answer next week," said Kenji Shiomura, an analyst at Daiwa Securities.
"As long as this optimism is dictating the tone in the market, the market is more likely to gain than fall from the current level after August 2."
The benchmark Nikkei dropped 0.7% to 9,833.03, after falling to as low as 9,824.34 after the yen edged higher. The benchmark is below its 25-day moving average around 9,940 and 200-day average around 9,924.
The broader Topix index fell 0.8% to 841.37.
The yen strengthened to a four-month high against the dollar to below 77.50 yen after U.S. stock index futures dropped on news that the U.S. House of Representatives will not vote tonight on a plan to raise the U.S. debt limit.
"The market is holding up pretty well, and players are buying shares of companies with firm earnings results, such as real estate firms," said Masato Futoi, head of cash trading at Tokai Tokyo Securities.
Mitsui Fudosan rose 2.1% to 1,469 yen after Japan's biggest property developer said on Thursday it may raise its full-year forecast after a recovery in apartment sales helped boost quarterly profit by 20%.
SONY, NINTENDO
Traders said earnings from many companies, including camera and copier maker Canon and steelmakers, pointed to a faster-than-expected recovery after the massive earthquake and tsunami in March.
Japanese industrial production data also showed manufacturers plan to boost output further in coming months as supply chain disruptions ease.
But the electronics sector underperformed, with Sony Corp also joining Nintendo in disappointing investors.
Sony fell 3.3% to 1,947 yen after the company cut its annual net profit forecast and slashed its outlook for TV sales, while keeping its operating profit forecast unchanged.
Nintendo nosedived 12% to 12,290 yen after hitting a low of 11,010 yen in the morning. The videogame maker slashed its full-year profit forecast far below market expectations to the lowest level in 27 years after it was forced to cut the price of its 3DS handheld games device to try to jumpstart weak sales, just six months after launching the gadget.
The tech sector is also being hurt by the yen's strength, with the yen not too far from a record high of 76.25 yen. Advantest fell 2.1% to 1,370 yen and Hitachi shed 1.2% to 479 yen.
Renesas Electronics Corp surged 3.2% to 669 yen after the Nikkei reported the firm will sell its audio processing chip segment to Murata Manufacturing Co, taking the ax to an unprofitable business and planning more cuts to come.
Volume was fairly higher than average, with 1.95 bln shares changing hands on the Tokyo stock exchange's main board. Declining issues outnumbered advancing issues by 1,266 to 304.
