Jan. 15 (Bloomberg) -- Japan's Nikkei 225 Stock Average closed below 14,000 for the first time in more than two years, led down by Honda Motor Co. after the yen strengthened to the highest in seven weeks, eroding the value of exporters' overseas sales.

Honda, Japan's second-largest automaker, dropped to a two- year low. Toyota Motor Corp., the biggest, retreated for a third day. IHI Corp., Japan's third-largest maker of heavy machinery that generates almost half of its sales from overseas, slid to a one-month low.

Stocks also declined after Bank of Japan Governor Toshihiko Fukui said the nation's economic expansion is slowing ``for the time being,'' reigniting concern that domestic demand is weakening as growth slows in the U.S., Japan's biggest overseas market. Mitsubishi UFJ Financial Group Inc. dropped for a third day.

``Today's market drop is due to the yen's appreciation and domestic demand weakening,'' said Kiyoshi Ishigane, who helps oversee $61 billion in assets at Mitsubishi UFJ Asset Management Co. in Tokyo. ``I'm avoiding exporters because a stronger currency will work against these companies, and financials.''

The Nikkei 225 Stock Average declined 138.16, or 1 percent, to close at 13,972.63, dropping below 14,000 for the first time since Nov. 10, 2005. The Topix index slid 27.38, or 2 percent, to 1,350.20, the lowest close since Sept. 16, 2005. More than 11 stocks fell for each that gained. Japan's markets were closed yesterday for a public holiday.

Yen Strength

Honda slumped 150 yen, or 4.4 percent, to 3,260, the biggest decline since Nov. 21 and its lowest close since Jan. 26, 2006. The company generates more than half of its earnings in North America.

Toyota fell 100 yen, or 1.8 percent, to 5,530, while Nissan Motor Co., the third-biggest, fell 31 yen, or 2.8 percent, to 1,060. Sony Corp., the world's second-largest maker of consumer electronics, slid 130 yen, or 2.2 percent, to 5,910.

The yen rose to as high as 107.38 against the dollar yesterday, the strongest since Nov. 27. The currency recently traded at 107.86. The yen strengthened 13 percent between June 22, when the currency dropped to the lowest since December 2002, and yesterday's high.

A stronger Japanese currency lowers the value of exporters' dollar-denominated sales when converted into yen.

``Investors are becoming cautious about companies' earnings because of the strengthening yen,'' said Naoki Fujiwara, who helps oversee $3.2 billion as chief fund manager at Shinkin Asset Management Co. in Tokyo.

Machinery Stocks Drop

The Topix Machinery Index slumped 5.3 percent, the worst performance today among the broad benchmark's 33 industry groups.

IHI lost 13 yen, or 6 percent, to 205, the lowest close since Dec. 13. Kawasaki Heavy Industries Ltd., Japan's second- largest maker of heavy equipment, plunged 20 yen, or 6.9 percent, to 269. It generated about 55 percent of sales overseas in the fiscal first-half.

U.S. Treasury Secretary Henry Paulson warned last week that growth slowed ``rather materially'' at the end of 2007. The Standard & Poor's 500 Index, which has had its worst start for a year since 1991, fell 1.4 percent on Jan. 11 before rebounding by 1.1 percent yesterday.

A report due later today may show sales at U.S. retailers stalled in December after a 1.2 percent gain the previous month, capping the weakest holiday shopping season in five years.

An increasing number of investors think ``the U.S. economy will be in recession rather than slowdown as employment statistics worsened in December and sales in the year-end shopping season were bearish,'' said Fujio Ando, who helps oversee about $1 billion in Asian equities as managing director at Chibagin Asset Management Co. in Tokyo.

Canon, Elpida Slide

Canon Inc., the world's biggest digital-camera maker, declined 100 yen, or 2.1 percent, to 4,650. Elpida Memory Inc., Japan's largest maker of computer memory chips, dropped 190 yen, or 5.9 percent, to 3,020.

Japan's economic growth will continue slowing, Fukui said today at a quarterly meeting of the central bank's branch managers in Tokyo. The outlook for the global economy is uncertain as oil and commodity prices rise and the U.S. economy loses steam, the governor added.

Mitsubishi UFJ, Japan's largest publicly traded bank, slid 13 yen, or 1.3 percent, to 999. Mizuho Financial Group Inc., the second-biggest, fell 7,000 yen, or 1.4 percent, to 503,000.

Inpex Holdings Inc., Japan's biggest oil and gas explorer, declined 50,000 yen, or 4.2 percent, to 1.13 million. The company and its partners in the Kashagan oil field agreed to cede a greater stake to Kazakhstan, reducing Inpex's ability to profit from the biggest crude oil discovery in the past 30 years.

Fast Retailing Co., Japan's biggest clothing retailer, jumped 670 yen, or 8.8 percent, to 8,320, the biggest advance since Aug. 9. First-quarter sales rose 11 percent, while profit climbed 8.7 percent, the company said on Jan. 10.

Nikkei futures expiring in March declined 1.3 percent to 13,980 in Osaka and Singapore.

To contact the reporter for this story: Chen Shiyin in Tokyo at schen37@bloomberg.net; Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

Last Updated: January 15, 2008 01:50 EST