Nikkei bounces on short covering but Canon sinks

Canon, which has a large proportion of its sales in Europe, plummeted as much as 13.8%t during the session

Japan's Nikkei share average wrestled back almost 1 percent on Thursday, lifting off a seven-week low as investors picked up stocks on better-than-expected earnings, but the rebound was seen as limited because of concerns over global demand.

Short-covering lent temporary support for battered stocks, while strong earnings for a few U.S. firms boosted Japanese companies in the same sectors.

But Canon, which has a large proportion of its sales in Europe, plummeted as much as 13.8 percent during the session, highlighting nerves about exposure to an unstable euro zone.

"I think the market has entered a downward spiral- it's three steps back and one step forward," said Yuuki Sakurai, CEO of Fukoku Capital Management. "There's no real problem with Canon the company itself, it's down to the extremely negative market atmosphere at the moment."

The Nikkei gained 0.9 percent to close at 8,443.10 after slumping to just 0.8 percent above its year-to-date low of 8,295.63 on Wednesday.

Hitachi Construction Machinery Co Ltd <6503.T>, which had been hit by worries of a slowdown in China, gained 6.2 percent after it cut its annual profit outlook less than analysts have expected. It was helped by U.S. rival Caterpillar boosting its outlook, while competitor Komatsu Ltd <6301.T> rose 4.5 percent.

Robot maker Fanuc <6954.T> gained 5.3 percent after it maintained its half-year profit outlook on Wednesday.

TDK Corp <6762.T> advanced 3 percent after U.S. hard drive maker Western Digital Corp's earnings beat market expectations on record sales, assuaging fears of a slowdown in the market.

TDK's exposure to the European market, hit by dwindling demand and a weak euro, has left it 11.9 percent down this month.

After one indebted Spanish region asked Madrid for aid last week and others seemed set to follow, fears that the euro zone's fiscal problems could yet deepen have dampened share prices of companies reliant on the region for sales.

Canon was one such stock, closing 7.8 percent down at a 40-month low after trimming its group net profit forecast by 14 percent to 250 billion yen, citing a slowdown in the global economy and the persistent strength in the yen.

"The yen isn't showing any signs of weakening and could get even stronger, which would mean the blue-chips that fought back today would slump again," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.

Many blamed the yen's gain -- about two percent versus the dollar and more than six percent against the euro -- as a major factor for the Nikkei's poor performance.

So far this month, the Nikkei is down 6.3 percent, underperforming most other markets except for southern European countries. Ex-Japan Asian-Pacific shares <.MIAPJ0000PUS> were down 1.2 percent in the same period.

The broader Topix index clawed back 1.2 percent to 714.91, although the gain came after it had fallen for 13 of the past 14 sessions.

OVERSOLD?

The market is likely to be oversold in the near-term, some market players say, after the ratio of short-selling rose to one of its highest levels in years, striking a 13-month high of 32.7 percent on Monday before dropping slightly to 31.9 percent on Wednesday.

"When we've had such a high level of short-selling in the past, the market usually rises within 20 business days, as short-sellers have to close their positions," said Jun Yunoki, strategist at Nomura Securities.

Among the battered shares that benefited from some short-covering was Panasonic Corp <6752.T>, with a gain of 2.7 percent on the day against a 23 percent loss on the month, and Sony Corp <6758.T> which recovered 4.9 percent after dropping 18.7 percent since June.

Elsewhere, Olympus <7733.T> jumped 9.6 percent after medical device maker Terumo <4543.T> said on Thursday it is proposing to invest 50 billion yen in Olympus and form a joint holding company.

Shares of Terumo, which is now competing with Sony <6758.T> in seeking a tie-up with Olympus, fell 0.8 percent.

Nomura Holdings <8604.T> was also lifted 5.7 percent on a report that its CEO would resign to take responsibility for the leaks on share offerings from within the company's brokerage unit.