Nikkei books 3-mth closing low on US rate worry

Tokyo, May 23: The Nikkei average posted its lowest close in three months on Tuesday, dropping 1.63 percent as exporters such as Honda Motor Co. Ltd. lost ground due to concern about more interest rate rises in the key U.S. market.

Mitsubishi UFJ Financial Group Inc. declined after its profit outlook disappointed investors, helping send the broader TOPIX index to its first close below 1,600 since late February.

Shares of Resona Holdings Inc. may be in focus on Wednesday.

Japan's fourth-largest lender said its annual profit rose nearly 5 percent, but forecast that its earnings would fall this year.

Concern about higher U.S. interest rates, and their effect on global stock markets, continued to prompt investors to shift funds into government bonds and other investments seen as lower risk, said Katsuhiko Kodama, a senior strategist at Toyo Securities.

''Right now, concern about further rate increases in the U.S. is having a big impact on the market,'' he said.

''The flow of money has changed ... It's bonds, in both the U.S.

and Japan.'' The Nikkei finished down 258.67 points at 15,599.20, its lowest close since Feb. 20.

The TOPIX finished down 2.27 percent at 1,579.26, also its lowest finish since Feb. 20.

The continuing slide in Tokyo share prices helped support Japanese government bonds for a third straight session.

The 10-year yield fell 3.5 basis points to 1.795 percent its lowest level since early April.

Shares of Honda Motor fell 3.7 percent to 7,280 yen on concerns that higher interest rates could crimp consumer spending in its key export market, the United States.

Fellow exporter Tokyo Electron Ltd. fell 4.3 percent to 8,120 yen.

Mitsubishi UFJ Financial Group, the most actively traded stock in terms of value, fell 6.1 percent to 1.53 million yen.

The world's biggest bank by assets reported a group net profit of 1.18 trillion yen (.5 billion), the largest ever for a Japanese bank, but said its profit would likely fall 36 percent this year, short of analysts' expectations.

News that ratings agency Standard&Poor's had lifted its outlook on Japan's long-term sovereign rating to positive from stable did little to boost the market.

U.S. RATES, GLOBAL IMPACT

Falls in U.S. stocks, which have been hit by concerns about further U.S. rate increases, were sending ripples across the world's markets, said Shigemi Nonaka, chairman of Polestar Investment Management.

''While it is sort of a catch-all reason, the fact is that as U.S. stocks decline, that impacts world stocks ... and it's true in Japan, too, where foreign investors now have a lot of influence.'' ''Things would be a little bit different if the U.S., if (Federal Reserve Chairman Ben) Bernanke, would say that an end to rate increases is coming. However, we don't know when they will stop, so that's having an impact on the market.'' Higher interest rates are seen as a negative for stocks as they raise borrowing costs and crimp consumer spending.

Sompo Japan Insurance Inc. fell 6.5 percent to 1,351 yen after the Asahi newspaper said the Financial Services Agency would order Japan's second-largest casualty insurer to suspend some operations for a month.

A Sompo Japan spokesman said the company had not been informed of any such measures by the FSA, and an FSA spokesman said it was not true that the agency had made such a decision.

Shares of Mitsubishi Electric Corp. fell 4 percent to 909 yen.

The company said the U.S. Justice Department is investigating it for possible antitrust violations related to its dynamic random-access memory business in the United States between 1998 and 2002.

Shares of Kissei Pharmaceutical Co. Ltd. jumped 7.1 percent to 2,065 yen after Deutsche Securities lifted its rating on the drug maker to ''buy'' from ''hold'' and raised its target price, citing expectations of stronger earnings growth ahead.

Trade was active, with 2.06 billion shares changing hands on the Tokyo exchange's first section, the highest since May 17. Declining stocks outnumbered gainers by a ratio of more than 6 to 1.

REUTERS