Nikkei falls on banks, weak capital spending

 

Japan's Nikkei stock average fell on Thursday, reversing from a fresh 5-1/2-year high earlier in the session, after banks offered downbeat earnings guidance and investors took profits in the face of doubts prompted by the breakneck speed of recent rises.

 

The market was also dented by weak company capital spending by over the March quarter.

 

Official figures published on Thursday morning showed Japan's economy grew at a faster-than-expected 0.9% in January-March from the previous quarter, but capital investment dropped 0.7% - inverting the market's expected 0.7% rise.

 

The benchmark Nikkei dropped 0.4 % to 15,037.24 points, after rising as high as 15,155.72, a level last visited in January 2008.

 

"It's just a healthy correction after such steep rises in Nikkei. The stocks had moved a little too fast," said Ryota Sakagami, chief equity strategist at SMBC Nikko Securities.

 

"But it's difficult to predict how long the correction phase will last. There are very few investors who are pessimistic on the Japanese stocks in the medium to long term."

 

Bucking the trend, Olympus Corp soared 18% and was the fifth biggest  percentage gainer after the camera and endoscope maker forecast a 274% rise in net profit at 30 billion yen for the current business year through March.

 

Japan's top three banks, however, forecast weaker annual earnings on Wednesday as aggressive monetary easing squeezes them out of the profitable government bond trade.

 

Mitsubishi UFJ Financial Group  dropped 3.6%, Mizuho Financial Group  shed 3.1% and Sumitomo Mitsui Financial Group  fell 3.0%.

 

Market observers said that the central bank's plan to purchase 70% of Japanese government bonds, part of its aggressive monetary easing, would be negative for banks' profits.

 

"If banks have strong lending businesses that can make up for the damage on JGB trading gains, there should be no problem. But company managements' risk-averse stance on capital spending indicates weak profits for banks," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

 

The Topix shed 0.6% to 1,245.23 in heavy trade, with 5.14 billion shares changing hands, a far larger than last month's average daily 4.31 billion shares.

 

LONGER TERM PICTURE INTACT

 

The short-term pullback has been widely expected. But in the longer term market analysts expect further rises in the Japanese market.

 

U.S. star bond investor Jeffrey Gundlach, who heads DoubleLine Capital LP, said on Wednesday that the benchmark Nikkei will hit 17,000 before year-end.

 

Nomura Securities, which said that Japanese equities have become more sensitive to exchange rates once the dollar broke above 100 yen last week, predicted the Nikkei could reach 16,000 if the dollar steadily heads toward 105 yen.

 

The index has gained about 45 % this year helped by Prime Minister Shinzo Abe's bold monetary easing and expansionary policies.

 

On the back of strong jobs data in the United States and the dollar trading above the 100-yen mark, the Nikkei had already broke above 15,000, the level investors once had expected to see around mid-June.

 

The yen dropped to 102.76 yen against the dollar on Wednesday, its lowest level since October 2008. The Japanese currency last traded at 102.39 to the dollar.