Nov. 18 (Bloomberg) -- Japan's stocks fell, led by developers and insurance companies, on concern the slowing economy will reduce property demand and push up securities losses on company balance sheets.

Mitsubishi Estate Co., the nation's No. 2 developer, sank 8.3 percent to a three-year low on speculation profits will fall as property demand slows and banks reduce lending. Sony Financial Holdings Inc., operator of Japan's fifth-largest insurer by value, dropped 9.2 percent after first-half earnings fell by more than a quarter. Oji Paper Co., the nation's biggest user of high-sulfur fuel oil, surged 6.9 percent after crude fell to a 21-month low.

The Nikkei 225 Stock Average broke 194.17, or 2.3 percent, to close at 8,328.41 in Tokyo, breaking a two-day gain. The broader Topix index slid 15.05, or 1.8 percent, to 835.44, with 22 of its 33 industry groups dropping. The value of stocks traded in Tokyo sank to the lowest since Sept. 1 and was a third lower than the average this year.

``Developers are being squeezed by tight cash flows,'' said Yoshinori Nagano, a Tokyo-based senior strategist at Daiwa Asset Management Co., which manages about $96 billion. ``Their situation won't improve as long as banks are suffering from declining lending demand and swelling losses on their assets.''

Japan's three biggest banks, including Mitsubishi UFJ Financial Group Inc., cut by more than half their full-year earnings forecasts in the past month as bad-loan costs rose. Tighter bank lending has contributed to 21 bankruptcies among Japan's property stocks this year, with the Dix Kuroki Co. becoming the latest failure last week.

Not Confident

The government confirmed yesterday Japan slid into its first recession since 2001 as overseas demand faltered and companies cut back investment. Economic and Fiscal Policy Minister Kaoru Yosano today said he isn't confident the nation's economy will rebound next fiscal year.

Mitsubishi Estate lost 8.3 percent to 1,280 yen, the lowest close since August 2005. Market leader Mitsui Fudosan Co. sank 5.9 percent to 1,302 yen. Condominium developer Hoosiers Corp. plunged 17 percent to 4,850 yen. The Topix Real Estate Index fell for a sixth day, closing at the lowest level since January 2004.

The slump in the nation's condominium market will likely continue into 2009 as high inventory levels prevent developers from bringing new properties to market, the Nikkei newspaper reported today. Industry experts expect unit offerings will fall below the 50,000 level forecast by domestic research agency Real Estate Economic Institute Co., Nikkei said without citing anyone.

Valuation Losses

The collapse in stock prices that has pulled the Nikkei down 45 percent this year is also hurting companies by way of valuation losses. Sony Financial slumped 9.2 percent to 264,600 yen, after saying net income dropped 27 percent in the six months to Sept. 30 because of losses on securities and an increase in insurance payouts.

Sompo Japan Insurance Inc. retreated 8.9 percent to 700 yen. Tokio Marine Holdings Inc., Japan's biggest listed insurer, dropped 8.8 percent to 2,845 yen.

Moody's Investors Service today said it may cut its credit rating on unlisted Asahi Mutual Life Insurance Co. as a drop in shares may erode the insurer's capital. Moody's, which rates Asahi Baa3, said it may reduce the rating by one or more levels.

Oji climbed 6.9 percent to 465 yen, driving papermakers to the biggest gain among Topix groups. Yokohama Rubber Co., the nation's second-largest tire maker, jumped 4.2 percent to 476 yen, while smaller competitor Sumitomo Rubber Industries Ltd. gained 4.2 percent to 827 yen.

Crude oil for December delivery sank 3.7 percent to $54.95 a barrel in New York yesterday, and has lost almost two-thirds of its value since a record on July 11. About 60 percent of the material used in tires is oil based, according to the Japan Automobile Tyre Manufacturers Association.

Cyclical Shift

``Investors are moving money from cyclical shares to defensive ones, such as paper producers,'' said Hiroshi Fujimoto, who helps oversee $5.7 billion at Shinkin Asset Management Co. in Tokyo. ``Expectations that lower fuel prices will help these companies cut costs are accelerating the shift.''

Stocks included in the Nikkei traded at 0.99 times book value yesterday. The gauge's price-book ratio fell to 0.87 on Oct. 27, the lowest since at least July 1989, based on Bloomberg data.

Shizuoka Gas Co., whose price-book ratio was the second lowest among power generators and gas suppliers, advanced 5.2 percent to 482 yen. Kyushu Electric Power Co. added 2 percent to 2,320 yen. A Topix gauge of utilities has dipped 6 percent this year, narrower than the broader index's 43 percent drop.

``Stocks have become cheap in terms of absolute price levels, as well as valuations, which will surely induce bargain hunting by long-term investors,'' said Daiwa Asset's Nagano.

Nikkei futures expiring in December retreated 2 percent to 8,320 in Osaka and declined 1.9 percent to 8,290 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

Last Updated: November 18, 2008 03:09 EST