Japanese Stocks Slip as European Borrowing Binge Shows Financial Stress

Dec. 22 (Bloomberg) -- Japanese stocks fell for the first time in three days amid slow trading before a holiday as record borrowing from the European Central Bank signaled how deeply the debt crisis has damaged the financial system.

Sumitomo Mitsui Financial Group Inc. (8316), Japan’s second- biggest lender by market value, slid 0.6 percent after banks borrowed 489 billion euros ($638 billion) from the ECB, the most ever in a single operation and about 70 percent more than economists forecast. Okuma Corp. (6103) and other makers of machine tools plunged after Bank of America Merrill Lynch said it’s “bearish” on the sector. Tokio Marine Holdings Inc. (8766) fell 1.7 percent after the insurer agreed to buy U.S.-based Delphi Financial Group Inc. for $2.7 billion.

“Banks want to secure cash to prepare for huge amounts of debt maturing next year,” said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co. “The more money banks get, the less stress they’ll have.”

The Nikkei 225 Stock Average (NKY) fell 0.8 percent to 8,395.16 at the 3 p.m. trading close in Tokyo, extending declines after Bank of Japan Governor Masaaki Shirakawa said the country’s economic recovery has paused. The broader Topix Index dropped 0.4 percent to 723.12. Trading volume on the gauge was about 28 percent below the 100-day average ahead of a public holiday tomorrow. For the week, the Topix was little changed.

Futures on the Standard & Poor’s 500 Index (SPXL1) slid 0.2 percent today after the gauge added 0.2 percent yesterday, lifted by energy and consumer shares. Equities in the U.S. fell earlier after banks sought more funds from the ECB than economists predicted. The ECB offered the three-year loans after Central Bank President Mario Draghi this week said bank rules prevent it from buying more government bonds to fight the debt crisis.

‘Stepping Up’?

“The ECB doesn’t seem to have stepped up to the plate for bond buying, which I think is negative,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which manages almost $100 billion. “At least they are acting as a lender of last resort for banks.”

Sumitomo Mitsui Financial Group slid 0.6 percent to 2,164 yen. Mitsubishi UFJ Financial Group Inc. (8306), Japan’s biggest lender, fell 0.3 percent to 326 yen.

Natural disasters at home and in Thailand have compounded woes this year for companies including Toyota Motor Corp., and Sony Corp., who are already facing reduced export demand. The Topix has lost about 20 percent in 2011, surpassing a 14 percent decline on the broadest index of stocks (TPX) in Europe, the epicenter of the debt crisis. The S&P 500 Index has slipped 1.1 percent.

Winners, Losers

The impact of Japan’s March 11 earthquake and tsunami has largely decided the market’s biggest winners and losers this year. Tokyo Electric Power Co., owner of the Fukushima nuclear power plant wrecked in the disaster, dropped 89 percent, the biggest decline on Topix. SxL Corp., a builder that has benefited from reconstruction work, surged 250 percent.

Stocks extended declines today after Bank of Japan Governor Shirakawa told the nation’s biggest business lobby that the economic recovery has paused. The central bank yesterday lowered its economic assessment for a second month, while refraining from expanding its asset purchases and lending programs.

Japan’s economy will expand 2.2 percent in the 12 months starting April as the country continues to rebuild from the March earthquake, the cabinet office said after markets closed. The projection is better that for all other Group of Seven nations next calendar year, according to estimates by the Organization for Economic Cooperation and Development.

‘Bearish’ On Toolmakers

Makers of computerized factory tools dropped today after Bank of America Merrill Lynch cut its rating on the sector to “bearish.” Lower industrial production and the yen’s rise to record-levels against the dollar suggest equipment orders will drop next year, the brokerage said in a note to clients yesterday.

Okuma, a manufacturer of drills and grinders, fell 8 percent to 484 yen after its rating was cut to “neutral” from “buy.” Makino Milling Machine Co. slid 6.4 percent to 466 yen.

Tokio Marine Holdings dropped 1.7 percent to 1,713 yen after agreeing to buy U.S.-based Delphi Financial Group for $2.7 billion in cash amid slowing Japanese demand. The deal price -- which includes a premium of about 71 percent, according to Bloomberg data -- may have a “negative impact on the company’s shares in the short term,” Wataru Otsuka, an analyst at Nomura Holdings Inc., said in a research note.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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