May 17 (Bloomberg) -- Asian stocks dropped for a seventh day after a report showing deflation in Japan deepened more than expected prompted investors to sell the nation's banks and property companies. Mizuho Financial Group Inc. led declines.

The Morgan Stanley Capital International Asia-Pacific Index, which tracks 944 stocks, lost 0.6 percent to 95.47 at 4:30 p.m. Tokyo time. The index fell for a seventh day, the longest losing stretch since September 2002. Other benchmarks around the region declined, except in Malaysia, the Philippines and China.

Japan's Nikkei 225 Stock Average fell 1.1 percent to 10,825.39, for a seven-day, 3.3 percent drop. That matched a similar streak that ended Oct. 18. The Nikkei reversed an earlier gain of as much as 1.1 percent after a gross domestic product report showed Japan's economy, the world's second largest, grew at more than twice the rate economists forecast.

``We got a mixed picture from the GDP report,'' said Hirofumi Kasai, who oversees the equivalent of $10 billion as chief investment officer at Tokio Marine Asset Management Co. in Tokyo. He's focusing more on stocks with low price-earnings ratios such as Toyota Motor Corp.

Hong Kong's Hang Seng Index lost 1.4 percent, set for its biggest decline in a month. Sun Hung Kai Properties Ltd. led a slide by developers on concern higher interest rates will damp demand. Australian retail-related stocks fell after clothing retailer Just Group Ltd. cut its earnings forecast.

Japanese Lenders

Japan's Mizuho led a drop by banks amid concern declining consumer prices will dent their efforts to clean up bad loans. Prices as measured by the GDP deflator fell 1.2 percent from a year earlier, compared with the 0.7 percent drop predicted by economists.

Mizuho, the nation's largest lender, sank 1.6 percent to 486,000 yen. Shinsei Bank Ltd., the first Japanese lender acquired by overseas investors, dropped 1.9 percent to 521 yen.

The economy expanded at an annual 5.3 percent pace, the Cabinet Office said in Tokyo. That exceeded the 2.4 percent median forecast in a Bloomberg News survey of 28 economists. Quarter-on-quarter, the economy grew 1.3 percent, more than the 0.6 percent forecast in the survey.

``The most recent figures look quite strong,'' said Norihiro Fujito, a senior strategist at Mitsubishi Securities Co. in Tokyo. ``The bigger-than-expected drop in the deflator figure is behind the muted gains.''

Property stocks declined on concerns falling prices will reduce their earnings. Japan's land prices have slumped by half from their peak in 1991.

Mitsui Fudosan Co., Asia's biggest property developer, declined 1.5 percent to 1,192 yen. Sumitomo Realty & Development Co., Japan's third-largest property developer, lost 2.5 percent to 1,159 yen.

Hong Kong

Developers and banks accounted for almost a third of the Hang Seng's drop, the largest slide among Asian benchmarks today.

Joseph Yam, the Hong Kong Monetary Authority's chief executive told the city's lawmakers that the HKMA is studying ways to make local interest rates track the U.S. more closely, the South China Morning Post reported yesterday.

The authority has lifted its key rate eight times since June, in step with increases by the U.S. Federal Reserve. Banks haven't raised their rates as many times because of the inflow of money from investors speculating China's yuan will be revalued, which has made more funds available in the city's money markets.

Sun Hung Kai Properties, Hong Kong's biggest developer by market value, fell 1 percent to HK$74.50. Cheung Kong (Holdings) Ltd., the city's second-largest developer, slid 1.1 percent to HK$71. HSBC Holdings Plc, a London-based lender that controls two of Hong Kong's biggest banks, lost 0.8 percent to HK$124.50.

End of Era

``Rising interest rates cause sharp market weakness,'' said Tim Leung, who helps manage $370 million in Asian stocks at IG Investment Management (Hong Kong) Ltd. Increased rates ``make the cost of doing business higher and slows down investment.'' He's been selling shares of developers.

Wheelock & Co. and Henderson Investment Ltd. fell after the Hang Seng Index's compiler said they will be removed from the benchmark on June 6. Wheelock, a developer and department store owner that's been in the index since 1964, slumped 5.1 percent to HK$11.25. Henderson Investment dropped 4 percent to HK$10.90.

Australia's Just Group tumbled 17 percent, the biggest decline since the company's initial public offering last year, to A$1.80. Earnings before interest, tax and amortization in the 12 months ending July 31 will be between A$67 million ($51 million) and A$73 million, compared with a previous forecast of more than A$80 million.

Coles Myer Ltd., Australia's biggest retailer, fell 0.9 percent to A$8.72. Wesfarmers Ltd., Australia's biggest home- improvement retailer, slumped 1.1 percent to A$35.65.

``There is clearly an underlying slowdown in consumer activity,'' said Michael Peet, a retail analyst at UBS AG in Sydney. ``We've had some pretty good times for consumer spending over the past four to five years and it has got to slow down sometime.''

To contact the reporter on this story: Darren Boey in Hong Kong at dboey@bloomberg.net

Last Updated: May 17, 2005 03:36 EDT