The Nikkei stock average fell on Wednesday as concerns mount over a deadlock in talks to raise the US debt ceiling, but expectations of improved Japanese corporate earnings could help it stay near four-month highs.
With US lawmakers sharply divided over how to reduce the country's deficit, buyers stayed on the sidelines, leaving profit-takers to dominate the market.
"Most people think the US can avoid default. But because the probability is not zero, investors may not feel comfortable about buying now," said Soichiro Monji, chief strategist at Daiwa SB Investments.
Still, hopes that earnings will be boosted by a faster-than-expected recovery in supply chains and consumer demand from the March 11 earthquake are lending support.
Solid quarterly results and guidance that came out on Wednesday from Fanuc and Nippon Steel underscored such expectations, following robust earnings from Canon and Kao Corp earlier this week.
The benchmark Nikkei closed down 0.5% at 10,047.19. But it is still up 2.4% so far this month and not far from its post-quake high of 10,207.91 hit earlier this month.
The broader Topix index fell 0.8% to 859.11.
Bucking the broader fall, Fanuc rose 1.2% to 14,730 yen. Nippon Steel, Japan's top steelmaker, rose 1.1% to 266 yen.
But JFE Holdings, the country's No 2 steelmaker, fell 1.5% to 2,129 yen after the company's annual profit forecast came in line with market expectations.
Worries are also growing that the country's exporters, many of which have just started to recover from supply chain disruptions, may be hurt by the dollar's weakness against the yen on the US debt mess. The dollar hit a four-month low
around 77.65 yen on Wednesday, inching near a record low of 76.25 yen hit in March.
Few analysts had predicted the dollar would fall below 78 yen.
"If the dollar falls to 75 yen, companies will probably say their profits look uncertain in this quarter even if April-June was not so bad," said Daiwa SB's Monji.
For now though, analysts said the Nikkei is expected to hold above the closely watched 10,000 mark while the market is looking at its 200-day moving average, now at 9,919, as a support level over the next week.
Tokyo Electric Power Co nosedived 16% to 431 yen, hit by concerns over the revised bill to help the utility compensate victims of the accident at its Fukushima Daiichi nuclear plant.
"Investors are worried about the possibility that shareholders may have to share some of the burden," said Mitsushige Akino, a fund manager at Ichiyoshi Investment Management.
The lower house on Tuesday passed the bill, which stipulates the need to place importance on the responsibility borne by Tepco shareholders going forward.
Decliners outnumbered advancers by 1,276 to 280.
Trading volume was 1.70 billion shares, slightly above the average in the past six days.
