Japan Stocks Drop on Dollar, U.S. Bank Concern; NEC Retreats

By Masaki Kondo

Aug. 12 (Bloomberg) -- Japanese stocks retreated from a 10- month high as a weaker dollar reduced overseas earnings prospects for automakers and after concern that profits won’t improve this year drove down U.S. financial shares.

Honda Motor Co., which gets almost half its sales in North America, slid 2.2 percent after the yen rose to a three-day high against the U.S. currency. Sumitomo Mitsui Financial Group Inc. sank 1.7 percent. Mitsui & Co., which generates most of its profit from commodities, lost 3 percent after oil and metals fell. NEC Corp. slumped 4.4 percent after people familiar with the plan said the computer maker will sell stock and bonds.

The Nikkei 225 Stock Average declined 82.50, or 0.8 percent, to 10,502.96 at the 11 a.m. break in Tokyo. The broader Topix index fell 8.73, or 0.9 percent, to 964.78, with about three times as many stocks retreating as advancing. Yesterday, both gauges rose to their highest closing levels since October.

“Given the recent rally, it’s no surprise that investors are booking profits,” said Masaru Hamasaki, a senior strategist at Tokyo-based Toyota Asset Management Co., which oversees the equivalent of $13 billion. “After what people are calling the once-in-a-century crisis, there is a sense of exhaustion among investors. Current valuations are prohibitive for them to buy more.”

Through yesterday, the Nikkei rallied 50 percent from a more than 26-year low on March 10 as better-than-estimated results from Japanese and U.S. companies raised expectations profits are recovering. That swelled average prices in the index to 47.5 times estimated earnings, the highest level in almost three weeks, according to data compiled by Bloomberg.

Sign of Decline

The Nikkei 225 finished 7.2 percent higher than its 25-day moving average yesterday, wider than the 5 percent gap that Nomura Holdings Inc., Japan’s largest brokerage, considers as a signal for a near-term decline.

Honda, which trades at 102 times its estimated net income, dropped 2.2 percent to 3,050 yen. Toyota Motor Corp., the world’s biggest automaker, fell 1.5 percent to 4,070 yen. Automakers weighed the most on the Topix.

The yen strengthened against the dollar to as much as 95.51 from 96.81 at the 3 p.m. close of Tokyo stock trading yesterday. A stronger local currency reduces the value of overseas sales at Japanese companies when converted into yen.

Sumitomo Mitsui, the nation’s No. 3 listed bank, slid 1.7 percent to 4,090 yen. Orix Corp., Japan’s largest non-bank financial company, dropped 2.7 percent. Sompo Japan Insurance Inc. dropped 4.6 percent after swinging to a first-quarter loss from a year-earlier profit.

U.S. Financials

In New York, the Standard & Poor’s 500 Index slid 1.3 percent, with the KBW Bank Index losing 4.4 percent, the most in almost two months. Dick Bove, an analyst at Rochdale Securities, said the recent rally in banking shares was driven by a change in investor sentiment and earnings in the industry won’t improve in the third and fourth quarters.

Mitsui, Japan’s No. 2 trading company by market value, fell 3 percent to 1,259 yen. Market leader Mitsubishi Corp. slid 2 percent to 1,934 yen.

Crude oil dropped for a fourth day with a 1.6 percent decline in New York yesterday. A gauge of six metals in London fell 2 percent.

NEC, Japan’s largest personal-computer maker, slumped 4.4 percent to 329 yen after people familiar with the plan said the company will sell as much as 200 billion yen ($2.1 billion) in stock and bonds.

Nikkei futures expiring in September retreated 0.7 percent to 10,510 in Osaka and declined 1 percent to 10,480 in Singapore.

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