Nikkei drops as euro zone worries prompt profit taking

TOKYO: Japan's Nikkei share average was on track to snap five straight days of gains on Tuesday as investors took signs of strife in peripheral euro zone countries as a cue to lock in profits, with the benchmark hovering near 33-month highs.

Hitachi Ltd was in the firing line, shedding 6.9 percent after the industrial machinery firm sliced 13 percent off its full-year operating profit outlook, citing sluggish demand in Europe and a slowdown in emerging markets.

But Panasonic Corp rocketed 8.1 percent to an 11-month high, extending gains from Monday, when it hit a one-day gain limit after reporting a third-quarter operating profit, turning around from a loss the previous year.

"It looks like hot money as well as some short-covering. Its results were not particularly unexpected, but once the price started going up, a lot of retail investors piled in," said Masato Futoi, head of cash equity trading at Tokai Tokyo Securities.

Japan Airlines Co Ltd was also in favour, jumping 4.6 percent to its highest level since its public offering last September, after the airline hiked its operating profit forecast by 12.7 percent to 186 billion yen ($2 billion) for the year to March 31.

The airline estimated the impact on its earnings from the grounding of Boeing's Dreamliner jet at around 700 million yen ($7.6 million) for the rest of this fiscal year, but said it will discuss compensation with Boeing.

By the midday break, the Nikkei had lost 1.3 percent to 11,112.44 as investors took renewed concerns about the euro zone debt crisis as a reason to lock in profits.

Spanish and Italian bond yields rose after a corruption scandal prompted calls for Spanish Prime Minister Mariano Rajoy to resign and on news of a probe of alleged misconduct involving an Italian bank three weeks before national elections.

"There will only be a spurt of profit-taking in reaction to this kind of news because it's just one small piece of a very long and drawn-out crisis," said Toshiyuki Kanayama, senior market analyst at Monex.

"The Nikkei was also begging for a fall after rising for five straight days."

Profit-taking meant some of the most sluggish stocks on Tuesday morning were those that have seen sharp gains over the past 2-1/2 months on hopes that Prime Minister Shinzo Abe's brand of aggressive monetary and fiscal policy will reinvigorate the economy.

The real estate sector, which has soared around 31 percent since mid-November, sagged 3.6 percent, while the insurers' sub-index, which has shot up 46 percent over the past 2-1/2 months, lost 2.7 percent on Tuesday morning.  "The market has been moving on expectation and speculation for months, but investors might start looking at the here-and-now soon," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.

"Companies that would benefit from a return to inflation - insurance, real estate and banks - might cool down because that hasn't actually happened yet, while the winners from a weaker yen will remain in focus because that's very real," he added.

The yen moved further off a fresh 33-month low hit on Monday morning of 93.185 against the dollar, to 92.38 by Tuesday morning. The Japanese currency's 14 percent slide since mid-November has propelled up exporters, whose overseas revenues will be swollen by a softer yen.

However, weakness in the yen came too late to much improve results from the last quarter, with 64 percent of the 88 Nikkei companies that have reported so far this earnings season missing analysts' estimates, according to Thomson Reuters Starmine.

While investors are hopeful the soft yen's benefits will start appearing in bottom lines next earnings' season, Sakagami said companies with a domestic focus may be sidelined as demand slows at home and signs of inflation still seem a long way off.

Index heavyweight Fast Retailing Ltd, the operator of the Uniqlo clothing chain, said domestic sales fell 5.5 percent in January from a year earlier, citing fewer weekend days in the month. Its stock fell 2.8 percent, taking 28.3 points off the benchmark.

The broader Topix dropped 0.9 percent to 951.91 in heavy trade, with volume at 114.2 percent of its full-day 90-day average.