(Adds stocks and comments)
By Taiga Uranaka
TOKYO, Jan 16 (Reuters) - Japan's Nikkei stock average fell
0.9 percent to a fresh 26-month low on Wednesday as investors
sold Honda Motor Co Ltd <7267.T> and other exporters on fears of
a possible recession in the key U.S. market and a surging yen.
Shares of Mizuho Financial Group <8411.T> also fell following
news it would buy a stake in Merrill Lynch <MER.N>, which is
raising capital to cope with subprime-related losses, although
some market players said the investment was positive for Japan's
second-largest bank.
Exporters such as Honda and Sony Corp <6758.T> led the broad
sell-off after the dollar fell to a 2-1/2-year low below 106.60
yen <JPY=> early in the morning, and after Wall Street tumbled
more than 2 percent amid worries over the economy.
"Some funds are dumping stocks to liquidate their positions
regardless of fundamentals," said Tomokatsu Mori, chief fund
manager at Fukoku Capital Management.
"Also, with the yen gaining against the dollar, there came
the biggest worry that exporters may finally slow down."
The market pared some of its losses minutes before the end of
the morning session. The benchmark Nikkei <> ended the
morning down 0.9 percent at 13,841.93 after falling as low as
13,594.32, its lowest since Oct. 31, 2005.
The broader TOPIX index <> was down 1.3 percent at
1,333.03. The TOPIX fell more than 3 percent at one point.
"Technicals suggest Japanese stocks have been oversold, and
buying came in as the Nikkei neared 13,500," said Takashi Ushio,
head of investment strategy division at Marusan Securities.
"But I am not sure whether the Nikkei will turn positive in
the afternoon, as we are still waiting for earnings by JP Morgan
<JPM.N> and Merrill Lynch <MER.N>."
A stronger yen will hurt exporters' earnings by reducing the
value of their overseas profits converted into the currency.
Automaker Honda fell 3.7 percent to 3,140 yen and Sony also shed
3.7 percent to 5,690 yen.
Industrial robot maker Fanuc Ltd <6954.T> plunged 6.3 percent
to 8,670 yen, the biggest drag on the Nikkei.
Trade was active, with 1.37 billion shares trading hands
compared to last week's morning average of 980 million.
Declining shares outnumbered advancing ones by roughly six to
one.
MIZUHO RIVALS RISE
Mizuho's two biggest rivals pared losses and ended the
morning session higher, with No. 1 Mitsubishi UFJ Financial Group
<8306.T> up 0.1 percent to 1,000 yen and No. 3 Sumitomo Mitsui
Financial Group <8316.T> gaining 0.2 percent to 831,000 yen.
Mitsubishi UFJ incurred some 50 billion yen ($470 million) in
subprime-related losses as of the end of last year, Kyodo news
agency said on Wednesday, citing sources close to the matter.
The bank had estimated appraisal losses of 23 billion yen on
subprime-related investments as of the end of October.
Mizuho ended the morning session down 2.8 percent at 489,000
yen, but some market participants viewed the investment in
Merrill positively.
"It's a lot better and a more solid scheme than a
contribution to a subprime fund," said Fukoku Capital's Mori,
referring to a botched U.S.-led subprime rescue fund. Japan's top
three banks were each once asked to put $5 billion in credit for
the fund.
"I think the Merrill investment is a positive move,"
Marusan's Ushio said, adding Mizuho shares were sold on concerns
for potential larger losses from the bank's own exposure to U.S.
subprime-related products.
Defensive stocks such as drugmakers and utilities were among
the day's standouts amid mounting worries over the economic
outlook for the United States and Japan.
Takeda Pharmaceutical Co Ltd <4502.T> gained 1.7 percent to
6,610 yen and Kansai Electric Power Co Inc <9503.T> rose 4.2
percent to 2,580 yen.
Nippon Meat Packers Inc <2282.T> jumped 8.5 percent to 1,191
yen after Mizuho Securities raised its rating on the company to a
"2" from "3", citing a strong domestic meat market and favorable
high-margin end-of-year gift-giving sales.
