Nikkei turns lower as banks hit by Basel report on cash cushion

By Ayai Tomisawa

TOKYO (Reuters) - Japanese stocks turned lower on Tuesday afternoon, erasing all of the earlier gains as banks were hit hard by a report saying that the Basel Committee may ask banks to boost capital as a sufficient cushion in case of spikes in interest rates.

The Nikkei dropped 0.9 percent to 18,626.46 in mid-afternoon trade, after a 0.2 percent rise at the midday break.

Banks were lower, with the banking subsector falling 2.2 percent and was the second biggest loser on the board. Mitsubishi UFJ Financial Group dropped 3.5 percent, Sumitomo Mitsui Financial Group shed 2.2 percent and Mizuho Financial Group declined 1.7 percent.

The Nikkei business daily said the proposal to boost banks' capital has been shepherded through the Basel Committee on Banking Supervision by the U.K. and Germany, which are concerned about a rise in rates, but Japan and the U.S. have raised strong opposition.

Japan's opposition stems from its banks holding massive quantities of government bonds: 128 trillion yen ($1.05 trillion) worth in January, the Nikkei said.

"The market was holding up in the morning and offset this concern in the banking sector. But since the market could not break through 19,000 despite a weaker yen, investors decided to take profits," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

The broader Topix fell 0.8 percent to 1,519.77 and the JPX-Nikkei Index 400 shed 0.7 percent to 13,821.11.

(Editing by Edwina Gibbs & Shri Navaratnam)