Japan stocks fall, focus on yen strength

Japanese Nikkei stock benchmark was down 2% on Thursday, cutting earlier losses as investors, shaken by a yen surge and a deepening nuclear power plant crisis, warily picked up shares savaged by heavy selling earlier in the week.

The yen slid after soaring above the previous 1995 peak in chaotic trading that triggered a series of stop losses and options like dominoes and forced domestic retail investors to unwind long positions they had built up against the dollar in the past few weeks.

The surge, which has significantly raised the risk of intervention by Japanese authorities, drove the yen as far as 76.25 per dollar and spooked equity investors. As the dollar recovered to around 79.50 yen, the Nikkei index recovered from a loss of more than 4%.

"Nikkei investors are watching the dollar/yen rate closely. The absence of rapid currency moves in the Tokyo session is helping the Nikkei calm down and hold above Tuesday's low," said Yumi Nishimura, senior market analyst with Daiwa Securities Capital Markets in Tokyo.

"There's still a possibility of more speculative selling of the dollar tomorrow if we don't hear any news about the intervention overnight."

The Nikkei share average was down 2.1% at 8,903.86 points, recovering slightly from intraday low of 8,639.56 as the yen weakened from its highs. The low from Tuesday when hedge funds led a selloff in the futures market was 8,227.63.

By the midday break, 1.8 billion shares changed hands on the Tokyo Stock Exchange's first section, suggesting that the day's tally would likely come well below Wednesday's 4.9 billion shares. Wednesday's volume was the second highest on record after Tuesday's all-time high of 5.8 billion shares.

Tokyo Electric Power Co, the operator of the stricken nuclear plant leaking radioactive material north of Tokyo, plunged 64.2% from its last traded price on

Friday. It was the most actively traded share on the Tokyo Stock Exchange's first section and by the midday break volume in the stock had hit 22.3 times the daily average for the past month.

Nikkei futures listed in Osaka were down 2.4% to 8,780 , trimming some losses after falling as far as 8,400 at the start of trade.

With the market regaining its footing, investors were picking up construction-related stocks. Contractor Kajima Corp was up 3.9 percent to 239 yen and Taiheyo Cement Corp rose 6 percent to 121 yen.

The broader TOPIX was down 1.8% to 802.59.

All eyes were on what action authorities would take to contain the yen, with some expectations Group of Seven countries would give Japan the green light to intervene against a stronger currency.

"With G7 scheduled to hold a conference call on Japan late Thursday, it seems inevitable that the yen will be part of a broader discussion on stabilizing global markets," Alan Ruskin, currency strategist with Deutsche Bank in New York, said in a note. "It would be nothing short of amazing if they fail to at least make some veiled threat of intervention."

With fears reaching fever pitch about radiation leakage from the stricken plant north of Tokyo and more governments warning their citizens about the dangers, the cost of insuring against Japanese government debt against default through credit default swaps has been rising and is now equal to that of South Korea.

Five-year CDS on Japan was quoted at 115 basis points on Thursday, widening around 15 basis points.

Ten-year Japanese government bond futures were up 0.24 point to 139.96, giving up some initial gains. The cash 10-year JGB yield slipped 2.5 basis points to 1.195%, still higher than Tuesday's low of 1.145%.

The Bank of Japan offered on Thursday to inject a further 5 trillion yen (USD 61 billion) into the banking system, trying to calm markets in the wake of the yen's spike to a record high against the dollar.

That came on top of a total of 28 trillion yen already offered in same-day operations this week in the aftermath of last Friday's devastating earthquake and tsunami.

North of Tokyo, the situation at the quake-crippled nuclear plant was intensifying with every minute. Japan was still trying to cool the troubled reactors and spent fuel rods as more warnings came of a catastrophic spread of radiation.

"As long as the situation at the plant remains uncertain we'll see big swings up and down without any fundamental reasons," said Yutaka Shiraki, senior strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.