Japan stocks pare losses but credit clouds outlook

TOKYO, Nov 21 (Reuters) Japanese stocks were down but off earlier lows on Wednesday after profit-taking erased the previous session's late gains, with exporters such as Honda Motor Co suffering from a slightly stronger yen.

Gains made by Wall Street on the back of strong energy prices were not enough to cancel out concern about the long-term course of the U.S. economy and credit fears, especially as new concerns emerged about the housing market.

U.S. financial and housing stocks had tough day after Freddie Mac, the No.2 provider of funding for mortgages, said it may slash its dividend and raise new capital as it works through what it called an ''extremely difficult year'' and its shares fell to an 11-year low.

''The situation in the U.S. suggests that the subprime mortgage problem has deep roots, and this is behind the poor tone of Japanese shares,'' said Norihiro Fujito, general manager of the investment research and information division at Mitsubishi UFJ Securities.

''Japanese pension funds and others are willing to buy if the Nikkei's at the 14,000 level, but reluctant if it rises much.

Volatile trade will likely continue for a while.'' A late recovery in Tokyo shares on Tuesday that lifted the Nikkei from a 16-month low and the TOPIX from a two-year low was based largely on short-covering, market participants said, and Wednesday's slide came as investors moved to take profits.

The dollar slipped in Tokyo to 109.70 yen edging back towards an 18-month low of 109.12 hit on EBS earlier this month.

Despite weakness in U.S. financial shares, Tokyo banks remained relatively firm on what market players said was a combination of short-covering and expectations ahead of an earnings report by Mitsubishi UFJ Financial Group ''With this out, the idea is that most of the news about Japanese banks' exposure to subprime loans will also be out, and worry about this will be finished as a factor,'' Fujito said.

At 0056 GMT the benchmark Nikkei was down 0.6 percent at 15,121.95, a loss of 89.57 points. It briefly touched 14,751.27 on Tuesday, its lowest since July 2006.

The broader TOPIX index was down 0.2 percent at 1,466.96.

EXPORTERS AND ENERGY The faltering dollar took exporters lower, with Honda down 2.6 percent to 3,690 and becoming the biggest drag on the Nikkei 225.

Canon Inc inched down as well, slipping 0.7 percent to 5,450 yen.

Energy-related issues strengthened on the back of firm oil prices, which jumped more than 4 percent on Tuesday to match an all-time high of .62 per barrel on weakness in the dollar and concerns over tight supply heading into winter.

Oil and gas developer INPEX Holdings Inc was up 3.6 percent at 1.15 million yen.

Mitsubishi Paper Mills Ltd gained 5.7 percent to 221 yen after Nikko Citi upgraded its rating to ''Buy/Medium Risk'' from ''Hold/Medium Risk'' citing potential for sustained earnings recovery with benefits from structural reforms.

The company said on Tuesday it agreed with Oji Paper Co Ltd to a business and capital tie-up in which Mitsubishi will raise 1.77 billion yen ( million) by issuing new shares to Oji.

It said the two will also form an alliance in carbonless and thermal paper.

REUTERS DKS BST0715