Japanese Stocks Drop on Concern Subprime Losses Will Spread

Japanese stocks dropped, joining a global sell-off, after BNP Paribas SA halted withdrawals from funds that owned subprime loan-backed securities.

Declines by lenders and brokerages including Mitsubishi UFJ Financial Group Inc. pushed the Topix index to an eight-month low. Exporters such as Canon Inc. declined on concern mortgage losses will lead to tighter lending conditions and slower global economic growth.

U.S. stocks tumbled yesterday as subprime mortgage contagion and hedge fund losses halted a three-day rally and sent brokerage shares to their worst rout since 2002.

``The BNP news triggered a worldwide slide, making people wonder how many more funds are in a similar position,'' said Masaki Iso, who oversees about $7.3 billion as head of Japanese equities at Yasuda Asset Management Co. in Tokyo. ``The magnitude of the drop suggests money is flowing out of hedge funds, forcing them to completely unwind their investments.''

The Nikkei 225 Stock Average slid 406.51, or 2.4 percent, to 16,764.09. The broader Topix index lost 49.88, or 3 percent, to 1,633.93, the lowest since Dec. 11. The slide was also the largest since its 3.4 percent fall on March 5.

For the week the Nikkei lost 1.3 percent while the Topix retreated 2.3 percent.

Six shares fell for every one that gained on the Tokyo Stock Exchange's first section.

About 4.7 trillion yen ($40 billion) in shares changed hands on the TSE first section, 59 percent more than the three- month daily average. The value of shares traded yesterday was a record 5.3 trillion yen.

Aozora's Subprime-Linked Securities

Japan's stock trading surged yesterday amid speculation hedge funds sold shares to meet redemptions as investors reduced risk because of U.S. subprime mortgage losses. More than 3.8 billion shares changed hands yesterday, the most since November 2005.

The yen gained against the euro and dollar on speculation the spreading U.S. subprime crisis will prompt investors to trim riskier assets funded by loans in Japan through so-called carry trades. It was recently at 161.35 to the euro and 117.99 per dollar, up from 165.18 yen and 119.63 at the close of trading yesterday.

Japan's bonds gained the most in two weeks as investors sought the relative safety of government debt. Ten-year bond futures for September delivery rose 0.90 to 134.28 on the Tokyo Stock Exchange.

Mitsubishi UFJ, Japan's biggest lender by assets, dropped 40,000 yen, or 3.3 percent, to 1.18 million. Nomura Holdings Inc., the nation's largest brokerage, declined 105 yen, or 4.8 percent, to 2,080. Canon, which made 75 percent of its sales outside Japan last year, fell 250 yen, or 3.9 percent, to 6,240.

Global Impact

Aozora Bank Ltd., which sold shares to the public in November, fell 13 yen, or 3.3 percent, to 387. The lender said it had about 21 billion yen of securities linked to subprime loans in the U.S. as of June 30.

Aozora wrote off a 4.5 billion yen unrealized loss from securities backed by U.S. subprime loans in the first quarter, according to the bank's statement to the exchange.

The Dow Jones Industrial Average fell 2.8 percent and the S&P 500 slid 3 percent, their worst declines since a Feb. 27 drop spurred by a sell-off in China. The slide wiped out more than half of a three-day recovery in U.S. markets.

After the market closed Countrywide Financial Corp., the biggest U.S. mortgage lender, said ``unprecedented disruptions'' in the U.S. home-loan market may crimp its ability to lend and erode profit.

Earlier, losses had swept through all 18 western European markets. The Dow Jones Stoxx 600 Index fell 1.8 percent.

`Run the Risk'

During the three days to Aug. 8, U.S. shares recouped about one quarter of the $1.6 trillion wiped out since July 13 by concern loans to risky home buyers will spread through credit markets.

BNP slid 3.4 percent yesterday, the biggest decline since May 24, after the bank joined Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemption. The funds had about 1.6 billion euros ($2.2 billion) of assets on Aug. 7, after declining 20 percent in less than two weeks, a spokesman said.

Dutch investment bank NIBC Holding NV also said yesterday it lost at least 137 million euros on U.S. subprime investments this year. NIBC is not listed.

``We could see more of these announcements of hedge fund failures and barred redemptions,'' said Seiji Iwama, who helps oversee $47 billion at Daiwa SB Investments Ltd. in Tokyo. ``This situation's making for some very oversold shares, but by buying right now you run the risk there'll be further losses as more news emerges.''

`Credit Crunch'

Nippon Steel Corp., which jumped 25 percent this year to yesterday, fell 31 yen, or 3.6 percent, to 826. It was the most actively traded stock by volume, with 87 million shares changing hands. Marubeni Corp., a trading company, slid 65 yen, or 6.6 percent, to 928 with the second-highest volume of shares traded. The stock soared 91 percent in the first seven months of this year.

The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent from 5.35 percent yesterday.

The European Central Bank said it would provide unlimited cash as the fastest increase in overnight Libor since 2004 signaled banks are cutting the supply of money. The U.S. Federal Reserve added $24 billion in temporary reserves to the banking system. Canada's central bank put C$1.64 billion ($1.55 billion) into financial markets yesterday.

``This credit crunch will continue to weigh on stocks for a while,'' said Yoshihisa Okamoto, a Tokyo-based fund manager at Mizuho Asset Management Co. with $26 billion in assets. ``We just don't see an end to it and it's prompting everyone to sell.''

Orix, Skymark

The Bank of Japan said after the market opened it will add 1 trillion yen of funds to the financial system in its daily money-market operation, the largest same-day operation since June 29.

Elsewhere, Orix Corp., Japan's No. 1 non-bank financial company slumped by the exchanged-imposed daily limit of 3,000 yen, or 11 percent, to 25,610 after the company said its operating profit, or sales minus the cost of goods sold and administrative expenses, fell 24 percent to 53 billion yen in the quarter to June 30.

Skymark Airlines Inc., Japan's largest low-fare carrier, climbed 7 yen, or 2.2 percent, to 320 after the company returned to profit in the first quarter as it flew more passengers.

Liquidations Boost Volume

Trading jumped in shares of companies such as Takeuchi Manufacturing Co., a maker of mini-shovels used for construction. Investors including Daiwa SB's Iwama speculated the high trading volume might be a result of selling by hedge funds forced to liquidate assets as investors pull out.

Takeuchi dropped 500 yen, or 8.1 percent, to 5,700 on share volume that was double its three-month average. Takeuchi had climbed 31 percent this year to July 26. Hosokawa Micron Corp. slid 83 yen, or 8.3 percent, to 922 with the number of shares traded jumped to almost four times its one-year average. Hosokawa, a maker of powder and particle processing machinery, advanced 20 percent in the first seven months in 2007.

Nikkei futures expiring in September dropped 2.7 percent to 16,750 in Osaka and declined 2.7 percent to 16,725 in Singapore.

The settlement price for Japan's Nikkei 225 Stock Average options contracts for August delivery was set at 16,669.27 after all stocks in the Nikkei 225 began trading.

Aozora Bank Ltd. (8304 JT)
Canon Inc. (7751 JT)
Hosokawa Micron Corp. (6277 JT)
Marubeni Corp. (8002 JT)
Mitsubishi UFJ Financial Group Inc. (8603 JT)
Nippon Steel Corp. (5401 JT)
Nomura Holdings Inc. (8604 JT)
Orix Corp. (8591 JT)
Skymark Airlines Inc. (9204 JT)
Takeuchi Manufacturing Co. (6432 JT)

source:bloomberg.com