Nikkei falls 3.7 percent on China factory surveys, worry Fed may reduce stimulus

By Ayai Tomisawa

TOKYO (Reuters) - The Nikkei share average tumbled 3.7 percent to a six-week low on Monday as weak Chinese factory activity and concern that the U.S. Federal Reserve may scale back stimulus earlier than expected weighed on investors.

The Nikkei dropped 512.72 points to 13,261.82, the lowest closing level since April 18.

The index has now fallen 16.8 percent from a 5-1/2 year peak hit last month, but it is still up 7.3 percent since the Bank of Japan's radical monetary expansion campaign was announced on April 4 and has risen 28 percent so far this year.

The market fell after global index rebalancing and profit-taking hit Wall Street, adding to a sell-off triggered by worries that the U.S. Federal Reserve may roll back stimulus and by slowing growth in China.

Market analysts said the downard correction probably had further to run, and investors are focused on whether the index will fall below 13,000, a level last seen before the central bank aggressively eased monetary policy under the new leadership headed by Governor Haruhiko Kuroda.

"The index being below that level is a 'pre-Kuroda' level... I don't think it will stay below 13,000. That's a level where you can place buy orders with your eyes closed," said Shun Maruyama, chief Japan equity strategist at BNP Paribas, adding that a Nikkei below 13,000 would be cheap.

"Right now, investors are repositioning their stances. Their positions were based on the conditions that the Fed will be cutting its stimulus in 2014 and Japan's long-term interest rate would not rise for a while... but that does not seem to be the case any more," Maruyama said.

On Monday, Chinese factory activity shrank for the first time in seven months in May as both domestic and external demand weakened, while activity in the services sector also slipped, adding to the negative sentiment in Japan, one of its largest trading partners.

The Topix fell 3.4 percent to 1,096.95, with all of its 33 sub-sectors in negative territory. Volume was relatively low, with 4.09 billion shares changing hands, compared with last month's daily average volume of 4.67 billion shares.

Some market participants said there was little evidence of panic selling by foreign investors, and there were expectations for a quick rebound and confidence in the broader fundamentals, though any delay in the recovery could change perceptions.

SOME SECTORS IN BEAR MARKET

Analysts said that profit-taking was likely to have most impact on financials and real estate stocks, which had been among the main beneficiaries of Prime Minister Shinzo Abe's reflationary policy.

"These stocks rose dramatically during the first three months of this year, so it is easy to take profits," said Hikaru Sato, senior technical analyst at Daiwa Securities.

Shares in securities companies, which have rallied sharply as the Japanese markets surged, were battered. The sector fell 9.0 percent and was the worst sectoral performer.

Nomura Holdings , Japan's top brokerage, lost 8.4 percent and was the third most traded stock on the main board, while rival Daiwa Securities Group plummeted 11 percent.

The securities sector has shed 26 percent from a five-year high reached on May 15, although it is still up 51 percent this year. Its 12-month forward price-to-earnings ratio stood at 19, below its 10-year average of 22.3 but sharply high than an average of 16.3 for Japanese equities, data from Datastream showed.

The banking sector dropped 5 percent. Since touching a 4 1/2 year high on May 15 it has lost 23 percent.

The real estate sector shed 6.4 percent, and has fallen 26 percent since hitting a 5-1/2 year peak on April 12.

Mitsubishi Estate Co tumbled 7.5 percent and Mitsui Fudosan Co dropped 5.3 percent.

(Additional reporting by Dominic Lau; Editing by Simon Cameron-Moore)