Nikkei slips, investors mull outlook for China-exposed firms

The Nikkei average fell on Tuesday as companies heavily exposed to China were caught up in tensions between China and Japan over a territorial dispute that disrupted business and production, and left investors pondering unsettled scenarios.

Should the anti-Japanese protests in China worsen or the dispute over the islands escalate, China-related companies would likely see further sell-offs as their earnings from the world's second-largest economy could come under pressure.

But were the matter resolved quickly, analysts said, Tuesday's sell-off in some China-exposed names would give investors a handy buying opportunity.

"Chinese factors have two aspects: if the situation prolongs, then it would weigh on the Nikkei and if the problem is resolved soon, it would spur a buy-back," said Masayuki Doshida, senior market analyst at Rakuten Securities.

The Nikkei share average ended 0.4% to 9,123.77 after rallying 1.8% on Friday after the US Federal Reserve launched its QE3 round of stimulus. Monday was a public holiday in Japan.

"The concerns are what, if anything, these Chinese protests turn into," said a senior dealer at a foreign brokerage said.

Investor demand for put options outpaced demand for calls. Societe Generale analysts said most popular put options on the Nikkei with an October maturity had a strike price at 8,250, nearly 10% below Tuesday's close.

The next most-traded was a put option at 8,750 followed by a call at 9,500 and another put at 8,000.

Nissan Motor Co sank 5% to seven-week low and was the most-traded stock on the main board by turnover after the automaker said on Monday it had suspended production in China for two days, while Honda Motor Co  dropped 2.5%.

Construction machinery makers Komatsu Ltd  and Hitachi Construction Machinery Co Ltd , which have considerable exposure to China, lost 1.8 and 2.3%, respectively.

Fast Retailing  sagged 7%, hitting a one-month low and marking its worst one-day%age loss in three months, after it said it would close more of its Uniqlo clothing stores in China on Tuesday, as it expects anti-Japan demonstrations there to escalate.

Other retailers have also closed many of their stores in China. Supermarket operator Aeon Co Ltd <8267.T>, which shed 2.8%, said it had closed 30 of its 35 stores in China as of Tuesday.

The broader Topix index added 0.2% to 758.36, with nearly 1.8 billion shares changing hands, down from a six-month high of 2.5 billion reached on Friday but up from last week's average of 1.62 billion.

The softer yen supported some exporters, with Mazda Motor Corp up 1%, Canon Inc <7751.T> adding 1% and industrial robot maker Fanuc Corp gaining 1.7%.

The yen was quoted at 78.656 to the dollar on Tuesday and had retreated as far as 78.93 on Monday, a one-week low, pressured by speculation the Bank of Japan might ease policy later in the week. It was well off a seven-month high of 77.13 hit last Thursday after the Fed announcement.

'Dirt-cheap Japan'

CLSA said the Japanese market "offers dirt-cheap optionality on an upturn in global markets."

"Japan is downside-protected, where Western markets have factored in good things that haven't happened yet. Topix has a strong track record as the geared play on global markets," said Nicholas Smith, Japan strategist at CLSA in a report.

According to Thomson Reuters Datastream, the Topix carries a 12-month forward price-to-book ratio of 0.82, much cheaper than the US S&P 500's 19.3 and the pan-European STOXX Europe 600's 1.33.

The Nikkei is up 7.9% so far this year, underperforming a 16.2 rise in the S&P 500 and a 12.5% gain in the STOXX Europe 600.

Ryota Sakagami, chief strategist at SMBC Nikko Securities, said the Fed move would stimulate US economic growth and drive the so-called "risk-on" trade, which will help keep the yen weak.

"This uptrend will continue until the end of November before the market starts to discount the impact of a fiscal cliff in the US I think in one to two months, the Japanese market will outperform the global market," Sakagami said.

He added that his year-end Nikkei target was 10,500 to 11,000, at least 15% upside from Tuesday's close.