Nikkei drops to 3-week low, hit by strong yen and Ukraine concerns

TOKYO (Reuters) - Japan's Nikkei share average tumbled to a three-week low on Wednesday as a stronger yen dragged down exporters and ongoing concerns about Ukraine hurt market sentiment.

The Nikkei was down 2 per cent at 14,170.48 in midmorning trade after falling as low as 14,160.08, its lowest since April 16. Last Friday, the index shed 0.2 per cent to 14,457.51.

Investors returned from a four-day Golden Week holiday to find the dollar had slipped to a three-week low of 101.49 yen.

Traders were also keeping an eye on developments in Ukraine, where supporters of Russia and of a united Ukraine are accusing each other of tearing the country apart. The former Soviet republic is sliding towards war.

"The current weak Japanese market is not just due to external factors," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management. "Investors are bracing for weaker-than-expected growth for this fiscal year mainly because of the dollar-yen levels. If companies don't have a weak yen buffer, how can they expect growth?"

He said that although analysts had expected Japanese companies would see a 10-15 per cent rise in their operating profits during the fiscal year through March 2015, they recently cut their growth projections to around 0-5 per cent.

Dwindling expectations of fresh stimulus from the Bank of Japan have also weighed on sentiment. BOJ Governor Haruhiko Kuroda has repeatedly insisted in recent weeks that the economy can weather the impact of the sales tax hike that took effect last month.

"Although Kuroda downplays the effect of the tax hike, investors don't seem convinced," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

According to Markit, Japanese service companies reported a fall in business activity in April, while new business declined for the first time in nine months due to the rise in the sales tax to 8 per cent from 5 per cent.

The headline seasonally adjusted Business Activity Index decreased to 46.4 from 52.2 in March, below the 50 threshold that separates expansion from contraction.

"This is hitting foreign investors' sentiment," Fujito said."The combination of a strong yen and weak business sentiment is strong enough to drag down bellwether exporters like Toyota and Honda."

Toyota Motor, which is scheduled to announce its full-year earnings this week, shed 0.9 per cent and was the third-most traded stock by turnover. Honda Motor dropped 2.9 per cent.

Index heavyweight stocks also underperformed. SoftBank slipped 2.1 per cent and was the most traded stock by turnover, while Fast Retailing dropped 1.9 per cent to 31,420 yen, its lowest since November.

The broader Topix fell 1.9 per cent to 1,159.72 while the new JPX-Nikkei Index 400 dropped 1.9 per cent to 10,544.19.

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