Japan's Nikkei share average fell on Tuesday, taking back half of Monday's gains as a promised bailout for Spanish banks left investors unconvinced that financial contagion would be contained, and doubts about the euro zone's future crept back.
Amid a broad sell-off, traditional defensive Japan Tobacco was the sole gainer in the Topix core 30 as investors cut their exposure to riskier assets.
"It's hard to be optimistic in this kind of climate," said Yuuki Sakurai, CEO and President of Fukoku Capital Management. "Even if Europe comes up with short-term solutions the problems we're seeing are likely to reoccur as the fundamentals haven't been fixed."
The Nikkei pared losses in the afternoon but closed down 1 percent at 8,536.72, a whisker above its 14-day moving average of 8,534.42. The benchmark index rose 2 percent on Monday as investors welcomed the euro zone's decision to provide Spain with 100 billion euros to shore up its banks, but the euphoria was short-lived.
" Yesterday was just a quick rebound driven by day traders who saw the Dow went up on Friday and so went out to buy," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
"But trading volumes didn't increase, it was just a quick spree."
In a reversal of fortunes, stocks in favour on Monday slipped, with Panasonic Corp losing 2.1 percent, Mazda Motor Corp down 2.9 percent and heavily traded Canon Inc dipping 0.3 percent.
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Japan Tobacco gained 2.1 percent, while social gaming operator Gree Inc, one of the most shorted stocks in Asia, shot up 8.6 percent as the most-traded share by turnover on the main board.
Construction was a stand-out sector with a gain of 1 percent as investors played it safe with defensive stocks. Nissei Build Kogyo <1916.T>, a prefab house builder, soared 9.8 percent after saying it would buy back 6 percent of its outstanding shares, while Sumitomo Realty and Development outperformed the market to gain 0.7 percent on a Credit Suisse upgrade.
The broader Topix index dropped 1.4 percent to 719.98 in moderate volume, at 80 percent of its average last week.
Although fears about the collapse of Spain's struggling banking sector were temporarily soothed on Monday, concerns remain about Greece's potential exit from the euro zone, and the poor fiscal health of other countries in the region.
"People will always seek out the next target. Will it be Italy? Will it be France? There's lots of possibilities ... That's a very dangerous topic," said Sakurai of Fukoku Capital Management.
The Nikkei hit a six-month low on June 4 after being pressured by concern about the euro zone, in addition to worries about slowing growth in the U.S. and China, but managed to end up on the week to break a nine-week losing streak, its worst run in 20 years.
TAXES TO HIT CONSUMPTION?
Electronics retailer Yamada Denki shed 3 percent after the company said its operating profit had fallen 28 percent in the year just ended and would only increase by 4 percent in the current year.
Retailers could be hit if Japan decides to double its consumption tax from the current rate of 5 percent to 10 percent by 2014. Prime Minister Yoshihiko Noda warned on Monday that he would call a snap lower house election if the tax bill does not pass the diet by June 16.
The IMF urged Japan to pass the bill to "demonstrate a commitment to fiscal reform and sustain investor confidence" on Tuesday in a statement following its annual review of Japan's economy.
" A tax increase will boost the retail sector in the short-term as consumers make big purchases before the law comes in, but once it does retail will suffer the most," s a id Yoshihiko Tabei, chief analyst at Kazaka Securities.
Market analysts also fear that an improvement in Japan's fiscal deficit would make Japanese government bonds more attractive to investors, bolstering the yen, which would weigh on the stock market.