Nikkei drops as weak China, U.S data take toll on exporters

By Ayai Tomisawa

TOKYO (Reuters) - Japan's Nikkei share average dropped on Monday, moving further away from near five-year highs tapped last week as exporters lost ground after weak economic data from China and the United States raised concerns over the outlook for the global economy.

Traders said that weak overseas markets as well as disappointing economic data crimped demand for risky assets, and domestic-demand sensitive sectors like real estate and financial sectors also succumbed to profit-taking.

The Nikkei fell 1.6 percent to 13,275.66, retreating from July 2008 levels of 13,568.25 tapped on Friday.

The mood in the market, which was already subdued by Friday's disappointing U.S. retail sales, deteriorated after soft China data raised concerns about the outlook for the world's second largest economy.

"The Japanese market will probably keep outperforming other markets led by domestic-demand sensitive stocks," said Masayuki Kubota, a senior fund manager at Daiwa SB Investments.

But he said that a short-term correction in Japanese equities could cap gains as investors have been nervous about the steep rise in the market.

"Europe's debt problems are considered long-term issues, China was thought to recover but the market was caught off guard by the poor data, and the U.S. economy is not showing a steady recovery."

China's economic recovery unexpectedly stumbled in the first three months of 2013 as the annual rate of growth eased back to 7.7 percent from the 7.9 percent set in the final quarter of last year, official data showed.

China-linked shares accelerated losses after the data published during the morning session. Construction machinery maker Komatsu Ltd dropped 2.9 percent and industrial robot maker Fanuc Corp shed 1.3 percent.

The yen, which rebounded after weak U.S. retail sales, also weighed on the exporters. The yen was last quoted at 98.03 yen to the dollar.

The U.S. data suggested consumer spending was considerably weaker in the first quarter than analysts previously believed, and many cut economic growth forecasts for the period.

Among exporters, Toyota Motor Corp dropped 2.1 percent, Nissan Motor Co fell 3.9 percent and Nikon Corp shed 2.1 percent.

Sharp Corp bucked the overall market and jumped 11 percent after the Nikkei newspaper said on Saturday that the struggling display maker has decided to sell its 9.2 percent stake in car electronics maker Pioneer Corp . Pioneer climbed 4.3 percent.

Mitsubishi Estate Co shed 2.1 percent, while Mitsui Fudosan Co was also hurt by a Goldman Sachs' downgrade, falling 3.6 percent. Mitsubishi UFJ Financial Group fell 1.5 percent and Sumitomo Mitsui Financial Group was down 3.3 percent.

The broader Topix dropped 1.3 percent to 1,133.99, with 4.23 billion shares changing hands.

Volume has been rising since the Bank Of Japan announced monetary easing in early April. Last week's daily average volume was 4.93 billion shares, compared with last month's average daily volume of 3.24 billion shares.

STILL UPBEAT

Traders were still bullish on Japanese equities. Nomura Securities raised its year-end forecast on the Nikkei to 16,000 from 14,500 after the Bank of Japan's massive stimulus measures under new Governor Haruhiko Kuroda, announced on April 4, while BNP Paribas lifted its prediction to 15,000 from 13,000.

Analysts at BNP Paribas also said that if risk aversion to financial markets increases, the central bank may move to the next phase of quantitative easing by increasing ETF purchases.

BNP recommended investors buy Nikkei call options and sell call options on Hong Kong's Hang Seng China Enterprise Index or South Korea's KOSPI among the strategies, saying it expected relatively less upside for the Chinese and Korean markets because of tight liquidity conditions.

The benchmark Nikkei has rallied more than 7 percent since the announcement from the BOJ, which promised to inject $1.4 trillion in the world's third-largest economy in less than two years. The index has risen more than 50 percent since Japanese prime minister Shinzo Abe called for aggressive monetary and fiscal expansionary policies last November.

(Additional reporting by Dominic Lau; Editing by Shri Navaratnam)