Sept. 6 (Bloomberg) -- Japan's stock indexes fell from four- year highs. Nitto Denko Corp. and Yakult Honsha Ltd. dropped after the companies weren't included in the five additions to the Nikkei 225 Stock Average in an annual review, some investors said.

``We're definitely seeing the impact on candidates that didn't make it into the Nikkei,'' such as Nitto Denko and Yakult, said Yoshifumi Ishii, who helps oversee $65 billion as co-head of passive investments at Nissay Asset Management Corp. in Tokyo.

Nippon Telegraph & Telephone Corp. led a gain in telecommunications shares after saying it will pay about $5 billion to buy back its stock today. Energy stocks such as Inpex Corp. declined along with a drop in oil prices.

The Topix index fell 4.27, or 0.3 percent, to 1286.29 at the 3 p.m. in Tokyo after rising as much as 0.5 percent. The Nikkei dropped 35.45, or 0.3 percent, to 12,599.43 after climbing 0.8 percent. Both indexes reached four-year highs yesterday.

Some 1.85 trillion yen ($16.9 billion) worth of shares included in the Topix traded today, 53 percent more than the three- month daily average.

Benchmarks advanced in the morning session as the drop in oil tempered concern higher fuel costs will slow global economic growth. The U.S., the world's largest oil user, is Japan's biggest export market, while Japan imports almost all its crude.

Indexes retreated at the start of afternoon trading as so- called program selling caused the Nikkei and Topix to give up their gains, according to brokerages such as Daiwa Securities Group Inc. and JPMorgan Chase & Co.

Nikkei Reshuffle

Program trading is institutional buying and selling of large amounts of stocks based on the spread, or the premium, between an index future and the market prices of the stocks involved.

Some technical indicators suggested Japanese stocks were poised to decline. The Nikkei's relative strength index, based on its 14-day moving average, reached 70.96 yesterday, exceeding a level of 70 that indicates to some analysts and investors that the index is likely to drop.

Nitto Denko, a maker of chemical products used in electronic components such as semiconductors, dropped 530 yen, or 7 percent, to 7,060. The stock had surged 23 percent since August. Yakult, which makes fermented milk products, lost 240 yen, or 8.9 percent, to 2,450, trimming its gain since Aug. 1 to 20 percent.

Sega Sammy Holdings Inc., Japan's largest maker of toys and video games, dropped 380 yen, or 4.5 percent, to 8,160. The stock had gained 23 percent since Aug. 1.

Hits and Misses

The three stocks were among the candidates many brokerages and investors had bet would be additions to the Nikkei in its annual review released yesterday, according to Ken Chang, a head of equity derivative strategy at Merrill Lynch & Co. in Tokyo.

Chang correctly picked Sky Perfect Communications Inc., T&D Holdings Inc. and Shinsei Bank Ltd. among the five stocks that were selected to join the Nikkei. The Nihon Keizai Shimbun Inc., the publisher of an eponymous business daily that provides the 56- year-old benchmark, made the announcement yesterday.

Managers of funds designed to mimic the performance of the Nikkei 225 may have to buy the shares to reflect the additions. At least 2.2 trillion yen in funds track the Nikkei 225, according to an estimate from Daiwa Institute of Research, the research unit of Daiwa Securities.

Sky Perfect, a satellite TV broadcaster, soared by the exchange-imposed daily limit of 10,000 yen, or 12 percent, to 94,400. The stock wasn't traded until the close on a glut of buy orders because analysts and investors didn't expect Sky Perfect to be picked, said Osamu Shintani, a market analyst at Daiwa Institute.

Predictions

``Sky Perfect certainly wasn't among our predictions,'' he said. Shintani, who also picked Sega Sammy and Yakult, correctly predicted that Shinsei Bank and T&D would be added.

Morinaga & Co., which makes confectionery goods, will be removed on Oct. 4 because of ``low liquidity,'' the Nihon Keizai said. The stock fell 8 yen, or 2.8 percent, to 281.

The remaining additions and deletions apply to companies that are either merging or establishing holding companies.

Nissay Asset's Ishii said the firm plans to buy shares of the additions on the day before their inclusions in the Nikkei.

NTT climbed 7,000 yen, or 1.5 percent, to 490,000. The company said it's spending 539.4 billion yen to buy back 1.12 million shares, or about 7.1 percent of its outstanding stock. The move will pare back the government's stake to about one-third, its minimum allowed.

``It's positive news the government didn't come directly into the market to sell its stake,'' said Yoji Takeda, who oversees $300 million as head of Asian equities at RBC Investment Management (Asia) Ltd. in Hong Kong.

Oil Stocks Drop

Energy-related stocks fell as crude oil prices declined. Inpex Corp., Japan's biggest oil explorer, fell 21,000 yen, or 2.4 percent, to 844,000. AOC Holdings Inc., its smaller competitor, lost 65 yen, or 3 percent, to 2,095.

Brent crude oil for October settlement declined 1.8 percent to $64.85 a barrel on the International Petroleum Exchange in London, the lowest close since Aug. 23.

In electronic trading in New York, oil recently fell 1.3 percent to $66.69 a barrel. Oil reached a record $70.85 on Aug. 30 after Hurricane Katrina struck U.S. Gulf coastal states.

Nippon Oil Corp., Japan's biggest refiner, fell 29 yen, or 3.2 percent, to 889. The company said 60 percent of the oil and natural gas production from its 27 offshore fields in the Gulf of Mexico remains shut after Hurricane Katrina hit the area.

Nippon Oil said 18 fields, accounting for production equivalent to 7,800 barrels of oil a day, aren't operating. Nine of the fields should return to production within two weeks.

AOC Holdings Inc. (5017 JT)
Inpex Corp. (1604 JT)
Morinaga & Co. (2201 JT)
Nippon Oil Corp. (5001 JT)
Nippon Telegraph & Telephone Corp. (9432 JT)
Nitto Denko Corp. (6988 JT)
Sega Sammy Holdings Inc. (6460 JT)
Shinsei Bank Ltd. (8303 JT)
Sky Perfect Communications Inc. (4795 JT)
T&D Holdings Inc. (8795 JT)
Yakult Honsha Co. (2267 JT)

To contact the reporter for this story: Michael Tsang in Tokyo at mtsang1@bloomberg.net.

Last Updated: September 6, 2005 02:34 EDT