Japan Stocks Fall on Concern Rising Provisions Will Hurt Banks

By Masaki Kondo
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Aug. 7 (Bloomberg) -- Japan's stocks fell, led by banks, on concern a slowdown in the nation's economy will force banks to increase provisions for bad loans, driving down earnings.

Chuo Mitsui Trust Holdings Inc. sent banks to their lowest in a week, after profit halved and American International Group Inc. posted $5.36 billion in writedowns. Daikin Industries Ltd., the world's second-biggest maker of air conditioners, plunged the most in 16 years after cutting its profit target. Fuji Heavy Industries Ltd. rose a second day as the yen fell against the dollar to the weakest in seven months.

``What's behind the drop in the market is worsening fundamentals in the Japanese and U.S. economies,'' said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of $61 billion. ``AIG's results were a kind of litmus test of investor sentiment.''

The Nikkei 225 Stock Average slipped 161.00, or 1.2 percent, to 13,093.89 at the 11 a.m. break in Tokyo. The broader Topix index fell 19.89, or 1.6 percent, to 1,257.38. Almost four stocks fell for each that rose on the Topix.

AIG, the world's biggest insurer by assets, said yesterday writedowns related to the U.S. housing slump wiped out its profit. Losses stemming from the collapse of the U.S. mortgage market have resulted in more than $493 billion in asset writedowns and credit losses among the world's largest financial institutions, according to data compiled by Bloomberg News.

Chuo Mitsui, the nation's 11th-largest bank, dropped 4 percent to 605 yen. The lender yesterday posted a 52 percent drop in first-quarter net income, and UBS AG cut its 12-month price estimate by 12 percent. Bigger rival Shinsei Bank Ltd. slumped 4.6 percent to 355 yen, while Mizuho Financial Group Inc., Japan's second-biggest listed bank by assets, lost 3.7 percent to 475,000 yen.

Cooling Demand

``With the deteriorating economy, domestic banks have to sacrifice earnings to build up provisions for bad loans,'' Mitsubishi UFJ's Ishigane said. ``This isn't limited to Chuo Mitsui.''

The government said yesterday the economy is ``deteriorating,'' acknowledging for the first time the country's longest postwar period of growth has probably ended.

Daikin tumbled 11 percent to 4,010 yen, headed for the sharpest drop since August 1992. The company yesterday cut its annual profit target by 3 percent, citing rising material costs and ``sluggish'' demand in Europe.

Fuji Heavy, maker of Subaru cars, jumped 4.7 percent to 599 yen, while Suzuki Motor Corp. added 2.7 percent to 2,265 yen. Daihatsu Motor Co., Japan's largest maker of minicars, rose 2.8 percent to 1,296 yen.

`Positive Surprise'

The yen weakened to as low as 109.88 versus the dollar in New York, a level unseen since Jan 10., from 108.34 at the close of stock trading in Tokyo yesterday. A weaker currency boosts the value of Japanese companies' repatriated overseas sales.

Kubota Corp., Japan's largest maker of tractors and mini backhoes, surged 14 percent to 748 yen, set for the biggest jump since April 2000. The company yesterday said rising material costs and a sales drop in North America drove down net income by 17 percent and operating profit by 9.5 percent.

The company's operating profit exceeded Goldman Sachs Group Inc.'s estimate by 44 percent, which was a ``positive surprise,'' analyst Shinji Kuroda wrote in a note to clients today. Kubota is likely to raise this year's earnings forecasts, he said.

Meanwhile, orders for Japanese machinery, which signal capital spending in the next three to six months, fell 2.6 percent from May, the Cabinet Office said today before the markets opened. That was about a quarter of the drop economists had estimated.

Nikkei futures expiring in September declined 1 percent to 13,100 in Osaka and sank 1.4 percent to 13,060 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.