ISSEI KATO
The Nikkei average resumed falling on Thursday following a rebound the day before, after rumours about the health of French banks re-ignited concerns over the euro zone's debt crisis and sent U.S. stocks down more than 4 per cent.
Banks and other financials, already trading well below book value, fell after rumours about the financial health of Societe Generale , which the bank denied, triggered a selloff in European and U.S. banks.
Carmakers and machinery makers also dropped as investors continued their shift into domestic-demand related and defensive sectors such as pharmaceuticals and retail from cyclicals, on worries over the state of the global economy and the strong yen.
"Losses in Japanese banks are limited because they started falling from already much lower levels than their oversees peers," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Tokyo.
"Another thing that's stopping investors from shorting Tokyo stocks more aggressively are hopes for the BOJ's ETF buying."
By midmorning the benchmark Nikkei average had fallen 1.7 per cent to 8,888.30, while the broader Topix shed 1.2 per cent to 767.05.
The banking index recouped some of its early heavy losses that brought it close to a fresh five-month low. It last traded down 1.2 per cent.
Mitsubishi UFJ Financial Group , Japan's largest bank by assets, fell 1.7 per cent to 358 yen, while Sumitomo Mitsui Financial Group dropped 1.5 per cent to 2,233 yen on relatively steady volume. Both banks were missing from the top five most actively traded stocks by trunover on the main board.
Banks have been one of the worst hit sectors since the March 11 disaster, hurt by speculation that they may have to forgive part of their loans to Tokyo Electric Power Co , which is still struggling with a radiation crisis at its Fukushima nuclear plant.
MUFG's shares are still down nearly 20 per cent from pre-quake levels, in line with the banking subindex. That compares with a 14.5 per cent fall for the Nikkei.
Speculation that France's AAA rating may be at risk also rattled markets, though the three major agencies reaffirmed the top-tier rating and said the outlook remains stable.
"We're looking to the downside today again, but as there has been much less volatility on the Nikkei than on Wall Street, falls will likely be limited," said Yumi Nishimura, a senior market analyst at Daiwa Securities.
Another factor that limited the Nikkei's losses was a slight rise in the dollar versus the yen. The dollar edged further away from an all-time low of 76.25 yen. The greenback last traded up 0.3 per cent at 77.05 yen.
SocGen was the weakest of the major French banks in Europe's stress test of its lenders last month. Investors have speculated it may have to raise about 3 billion euros to reach new global capital standards if the euro zone crisis worsens.
Nikon Corp bucked the trend and jumped 4.3 per cent to 1,686 yen after the camera and precision equipment maker raised its forecast above market expectations on record sales of cameras and solid demand for LCD steppers.