Nov. 27 (Bloomberg) -- Japanese stocks fell, dragging the Nikkei 225 Stock Average to its biggest drop in eight months, on concern Dubai will fail to pay construction companies and the dollar’s weakening to a 14-year low will hurt exporters earnings.

Kajima Corp.’s 14 percent plunge led the drop in the Nikkei 225 after Daiwa Securities SMBC Co. said builders may lose “tens of billions of yen” if Dubai’s investment fund succeeds in delaying debt payments. Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. slid after people familiar with the matter said they may be owed money by the Dubai company. Sony Corp., which gets 23 percent of its sales from the U.S., fell 4.4 percent after the dollar slumped below 85 yen.

The Nikkei 225 lost 3.2 percent to 9,081.52 in Tokyo, its biggest drop since March 30 and the lowest close since July 13. The broader Topix index fell 2.2 percent to 811.01, with four times as many stocks declining as rising. Both gauges posted their fifth weekly decrease.

“This is a very challenging situation for investors,” said Hisakazu Amano, who helps oversee the equivalent of $19 billion at T&D Asset Management Co. in Tokyo. “If a state or large company defaults, banks tighten loans and reduce their holdings of risk assets, triggering a series of collapses among institutions that otherwise wouldn’t fail.”

For this holiday-shortened week, the Nikkei 225 retreated 4.4 percent, the most since the five days ended Oct. 2, after the government said for the first time in three years that Japan’s economy is in deflation. Stocks in the Topix traded at 1 time book value, the lowest level since March 31, according to data compiled by Bloomberg.

Dubai Concern

Japan’s statistics bureau said before trading opened that consumer prices excluding fresh food fell 2.2 percent last month year-on-year, and the unemployment rate declined to 5.1 percent in October from 5.3 percent a month earlier.

U.S. markets were closed yesterday for the Thanksgiving holiday, while Europe’s Dow Jones Stoxx 600 Index dived 3.3 percent, the most since April 20. Dubai World, the state holding company, will ask creditors for a “standstill” agreement as it negotiates to extend debt maturities, Dubai’s Department of Finance said Nov. 25.

Kajima, Japan’s biggest listed construction company, plunged 14 percent to 162 yen and Obayashi Corp. fell 8.7 percent to 284 yen. They were the steepest declines in the Nikkei 225.

Dubai borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub.

‘Manageable’ Loss

The companies may lose “tens of billions of yen” should they fail to receive revenue from projects, Hiroki Kawashima, an analyst at Daiwa Securities, said in a report today.

Mizuho, Japan’s No. 3 bank by market value, slid 3.9 percent to 148 yen, while bigger rival Sumitomo Mitsui lost 3.7 percent to 2,620 yen. Mizuho may be owed about $100 million by Dubai World and Sumitomo Mitsui may be owed at least $225 million, according to people familiar with the matter.

Goldman Sachs Group Inc. said in a report today that the potential incremental credit costs at Mizuho, Sumitomo Mitsui and Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, are “manageable.” Mitsubishi UFJ sank 2.2 percent and was the most-traded stock by value in Japan.

Sony, the maker of the PlayStation 3 game machine, fell 4.4 percent to 2,265 yen. Honda Motor Co., a carmaker that gets 47 percent of its sales in North America, lost 3.8 percent to 2,660 yen. Makers of electronics and cars contributed the most to the Topix’s slump among its 33 industry groups.

No Recovery?

The dollar depreciated to as low as 84.83 per yen today, the weakest since July 1995. A weaker dollar reduces the value of overseas sales at Japanese companies when repatriated.

“Japanese exporters have exerted every effort to cut costs and were poised to be profitable once demand recovered, and that’s now being threatened by the strong yen,” said T&D’s Amano. “In the long run, we can hardly expect company earnings to recover in Japan.”

Finance Minister Hirohisa Fujii said today he will contact U.S. and European authorities about currencies if necessary. Japanese Deputy Prime Minister Naoto Kan told reporters he hadn’t heard anything about possible yen intervention.

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

Last Updated: November 27, 2009 02:28 EST