Nikkei flat as chips fall, domestics advance

TOKYO, Oct 19 (Reuters) The Nikkei share average was little changed on Thursday, as sharp losses in chip stocks such as Tokyo Electron Ltd. countered gains by large companies focused on the domestic economy, such as Mizuho Financial Group Inc. and Japan Tobacco Inc.

Investors also shifted funds into domestic-demand start-ups and other small-cap stocks. Shares of online shopping mall operator Rakuten Inc. climbed for a second session after a brokerage upgrade.

Makers of chip equipment were punished for a second session after an announcement by chip giant Intel Corp. on Tuesday that it had lowered its forecast for capital spending.

''Intel's lowering of its capital spending is one big reason,'' said Takashi Ushio, head of the investment strategy division at Marusan Securities, referring to the decline in firms such as Tokyo Electron.

''But I think this is purely short-term selling because of Intel.... At present, Tokyo Electron's earnings are not in bad shape,'' Ushio said.

Tokyo Electron Ltd., the world's second-largest supplier of tools used to make microchips, fell 2.7 percent to 9,040 yen, adding to a drop of 2.2 percent on Wednesday, when it was also hit by both a brokerage downgrade.

Advantest Corp., the world's largest maker of tools used to test chips, dropped 3.2 percent to 6,150 yen, becoming the biggest contributor to the Nikkei's decline.

Further dampening sentiment for chip-gear makers, North American suppliers of chip-making equipment reported on Tuesday that September orders fell 6 percent from the previous month.

''The market had been somewhat positive on Japanese chip stocks. They had seen some buying, so it is really easy to take profits in stocks such as Advantest and Tokyo Electron,'' said Kenichi Hirano, operating officer at Tachibana Securities.

The Nikkei finished the morning down 0.06 percent, or 10.09 points, at 16,642.91.

Reflecting gains in banks and other large domestic-focused firms, the broader TOPIX index was up 0.30 percent at 1,643.58.

DOMESTICS LARGE AND SMALL Investors shifted funds into shares of companies sensitive to the domestic economy, both blue-chips and start-ups.

Japan Tobacco, which makes some 80 percent of its sales at home, rose 3 percent to 521,000 yen.

Mizuho Financial, Japan's third-largest lender, rose 0.9 percent to 914,000 yen.

Domestic-demand companies, large and small, have lagged behind rises in tech firms, said Toshihiko Matsuno, assistant general manager at the investment research department at SMBC Friend Securities.

''Investors have moved away from techs, which have supported the Nikkei up until now and are now starting to concentrate on large-cap, leading firms such as megabanks,'' Matsuno said.

''The small-cap markets are improving as well,'' he said.

Rakuten gained for a second straight session, adding 7.5 percent to 49,700 yen on the Jasdaq market for start-ups. An upgrade by brokerage Lehman Brothers sent the stock up by its daily limit on Wednesday and sparked buying of other small-cap stocks.

Elsewhere, shares of Seiko Epson Corp., the world's second-largest maker of ink jet printers, rose 2.2 percent to 3,270 yen after it said on Wednesday its first-half operating profit likely tripled, thanks to a streamlined product lineup, cost cuts and a weaker yen.

Trade volume was virtually unchanged with 744 million shares changing hands, compared with 745 million shares on Wednesday morning.

Advancers outpaced decliners by a ratio of more than two to one.

REUTERS PDM ND1006