Japan Stocks Fall, Led by Financial Shares on Concern of Losses

By Patrick Rial and Satoshi Kawano

Oct. 14 (Bloomberg) -- Japanese stocks fell, led by financial shares on concern government policies will force banks to book more loan losses.

Mitsubishi UFJ Financial Group Inc., the country’s biggest lender by value, dropped 3 percent after the Nikkei newspaper said Japan Airlines Corp. may seek debt relief of 300 billion yen ($3.36 billion). The airline lost 3.8 percent. Nomura Holdings Inc., Japan’s largest brokerage, fell 2.9 percent after Meredith Whitney said she was “far less bullish” on banks and cut her rating on Goldman Sachs Group Inc., citing valuations.

The Nikkei 225 Stock Average declined 0.1 percent to 10,066.86 as of 12:55 p.m. in Tokyo. The broader Topix index slipped 0.9 percent to 893.50, headed for its first loss in six days. More than three shares retreated for each that advanced.

“It looks like more companies will have their loans forgiven, when really they should be using the bankruptcy process,” said Tomomi Yamashita, a Tokyo-based fund manager at Shinkin Asset Management Co., which oversees about $5.5 billion. “This kind of policy may be good for the small businesses and others receiving help, but it’s very negative for the financial markets. Investors still expect banks to announce additional capital raisings.”

The government drafted a plan last week to grant a three- year moratorium on loan payments for some small businesses. Financial Services Minister Shizuka Kamei said yesterday that, while the program won’t be mandatory, “we will give incentives to the banks so that the purpose of the law will be executed.”

Financials Decline

The Topix index has slumped 8.5 percent since its 2009 peak on Aug. 26, weighed down by concern that policies of Japan’s new government will hamper a recovery in earnings. Shares on the benchmark trade at an average of 38 times estimated earnings, compared with 20 times at the start of the year. Japan’s market was the only one to fall today in Asia besides the Philippines.

Mitsubishi UFJ lost 3 percent to 486 yen. Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest publicly traded lender, fell 4.4 percent to 3,280 yen. Sumitomo Trust & Banking Co. tumbled 5.2 percent to 470 yen, the sharpest drop in the Nikkei 225. The Topix Banks Index posted the second-steepest decline among the Topix’s 33 industry groups.

The Nikkei newspaper said Japan Airlines may seek debt relief totaling 300 billion yen, including loan waivers and debt-for-equity swaps, under a rehabilitation plan overseen by a government panel. The shares dropped 3.8 percent to 128 yen.

Mitsui Sumitomo, Aioi

Mitsui Sumitomo Insurance Group Holdings Inc., which is buying Aioi Insurance Co. to create Japan’s largest non-life insurer, lost 4.1 percent to 2,210 yen. Aioi dropped 4.4 percent to 413 yen. Natsumu Tsujino, an analyst at JPMorgan Chase & Co. in Tokyo, cut both shares to “neutral” from “overweight.”

“Although the overall sector appears attractively valued, as we have noted for some time, we lower our ratings because we do not sense significant momentum from the merger,” Tsujino said in a report dated yesterday.

A measure of financial stocks in the Standard & Poor’s 500 Index dropped 1.1 percent yesterday in New York, the biggest decline among 10 industry groups, after Whitney cut Goldman Sachs to “neutral” from “buy.”

The analyst, who left Oppenheimer & Co. this year to create her own firm, predicted in October 2007 that Citigroup Inc. would have to cut its dividend, which the bank did in January 2008. Her recommendation triggered what was at the time the steepest tumble in Citigroup shares since September 2002.

Nomura, Daiwa Securities

Nomura slumped 2.9 percent to 639 yen. Daiwa Securities Group Inc., Japan’s second-biggest brokerage, decreased 3.7 percent to 465 yen.

“The market is going to struggle to gain ground as investors look to lock in recent gains on financials,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.

Sekisui House Ltd., Japan’s largest homebuilder, climbed 1.5 percent to 765 yen. Taisei Corp., the nation’s fourth- largest construction company by revenue, increased 3.5 percent to 176 yen. Both stocks were lifted to “outperform” from “neutral” by Yoji Otani, an analyst at Credit Suisse Group AG. Both shares are trading at unusually large discounts to book value, the analyst wrote in a report.

So-called defensive stocks climbed as investors snapped up shares of companies whose earnings are considered to be insulated from a weakening economy. Japan Tobacco Inc., the world’s third-biggest maker of cigarettes, added 2.3 percent to 273,600. Kao Corp., Japan’s largest maker of household and personal-care products, climbed 3.8 percent to 2,185 yen.

Japan’s producer prices fell 7.9 percent in September from a year earlier, in-line with economists’ estimates, as oil traded below last year’s levels and demand for materials waned.

“Valuations simply don’t work in this environment; the only determinant of the market’s trend is whether the economy is growing or shrinking,” said Takashi Kamiya, who helps oversee some $16 billion at T&D Asset Management Co. in Tokyo. “We’re headed for a slowdown and I doubt the next stimulus measures to rescue the economy will help as much as investors are expecting.”

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Satoshi Kawano in Tokyo at Skawano1@bloomberg.net.