Dec. 12 (Bloomberg) -- Japanese stocks fell after the Federal Reserve said the U.S. economy is slowing and cut interest rates by a quarter point, disappointing investors. Mizuho Financial Group Inc. led the drop.

The central bank lowered its benchmark rate to 4.25 percent yesterday, by less than some investors had expected, and said ``economic growth is slowing.'' Before the cut, futures trading showed 36 percent odds of a half-point reduction to 4 percent.

``The quarter-point rate cut was simply a disappointment when the market was hoping for more,'' said Takashi Kamiya, who helps oversee $16 billion at T&D Asset Management Co. in Tokyo. ``Most investors seem optimistic about a U.S. recovery next year, but the risk is all on the downside that things will worsen. The theory is that Asian economies will grow even if the U.S. drops off, but so far there's no proof of that.''

Shares pared declines in the afternoon session after the yen weakened and the Financial Times reported the Fed would revise its means of providing liquidity to financial markets.

Nippon Oil Corp. led gains by oil-related companies after the price of crude jumped in New York.

The Nikkei 225 Stock Average dropped 112.46, or 0.7 percent, to 15,932.26 at the close of trading in Tokyo. The broader Topix index lost 10.09, or 0.6 percent, to 1,556.93. The gauges earlier fell 2.2 percent and 2.1 percent respectively.

Mizuho, the second-biggest lender by market value, fell 12,000 yen, or 1.9 percent, to 623,000. Orix Corp., the nation's largest non-bank financial company, slid 540, or 2.3 percent, to 22,790.

Japan Recession?

The U.S. housing slump, entering its third year, will cool consumer spending and slow growth in the world's largest economy to 1 percent in the fourth quarter, a Bloomberg survey showed, down from a previous estimate of a 1.5 percent expansion.

The Dow Jones Industrial Average and Standard & Poor's 500 Index both fell more than 2 percent yesterday.

The Financial Times reported on its Web site the Fed will announce a new loan auction system to provide funds to financial institutions, increasing liquidity. The central bank's current discount window system has a stigma attached, the paper said, because investors sometimes infer financial problems prompt banks to use it.

Nippon Oil, Japan's largest petroleum refiner, climbed 33 yen, or 3.8 percent, to 894. Itochu Corp., the nation's No. 4 trading house, rose 32 yen, or 2.8 percent, to 1,172. Mitsui & Co., which gets most of its profit from dealing commodities, climbed 40 yen, or 1.6 percent, to 2,505.

Crude oil for January delivery rose 2.5 percent to $90.02 a barrel yesterday.

Yen Movement

Domestic demand-related shares fell after Morgan Stanley said Japan is headed for a ``mild recession'' in 2008. Mitsubishi Estate Co., the nation's No. 2 property developer, slumped 75 yen, or 2.5 percent, to 2,910. East Japan Railway Co., Japan's biggest rail operator, fell 19,000 yen, or 2 percent, to 945,000.

Government policy has hurt consumers and the building industry at home, and credit problems stemming from the subprime-mortgage crisis will stifle demand from abroad, Takehiro Sato, chief Japan economist at Morgan Stanley, wrote in a report yesterday.

The yen weakened to as low as 111.15 versus the dollar in the afternoon after climbing to as high as 110.63 during the morning trading session. A weaker yen increases the value of exporters' dollar-denominated sales when converted into local currency.

IHI Corp. plunged 28 yen, or 11 percent, to 216, the lowest since October 2005 and the largest percentage move among 1,961 stocks globally in the MSCI World Index. Japan's third-biggest maker of heavy equipment was placed on a watch list for possible delisting, following the company's restatement of earnings figures from last year. The shares were untraded yesterday.

Crude Oil Rises

Don Co. surged 80 yen, or 17 percent, to 555 in Osaka, the biggest gain since March 7, 2002, after the Nikkei newspaper reported rival beef-bowl restaurant operator Yoshinoya Holdings Co. will spend 10 billion yen ($90.1 million) to acquire the Japanese steakhouse chain.

Yoshinoya lost 1,000 yen, or 0.5 percent, to 196,000 yen. Nothing has been decided, the Tokyo-based company said in a statement today, without saying whether the companies were in talks.

Nikkei futures expiring in December slumped 1.1 percent to 15,900 in Osaka and fell 1.2 percent to 15,900 in Singapore.

Don Co. (8216 JO)
East Japan Railway Co. (9020 JT)
IHI Corp. (7013 JT)
Itochu Corp. (8001 JT)
Mitsubishi Estate Co. (8802 JT)
Mizuho Financial Group Inc. (8411 JT)
Nippon Oil Corp. (5001 JT)
Orix Corp. (8591 JT)
Yoshinoya Holdings Co. (9861 JT)

To contact the reporter on this story: Patrick Rial in Tokyo at prial@bloomberg.net.

Last Updated: December 12, 2007 02:08 EST