Nikkei drops 0.5% on stronger oil prices, yen

Japan's Nikkei average dropped 0.5% on Monday as instability in Libya pushed US crude prices higher and stoked safe-haven demand for yen, pressuring shares of exporters.

The Nikkei's losses were limited as Mizuho Trust & Banking Co Ltd 8404.T and two other subsidiaries of Mizuho Financial Group 8411.T jumped after a source told Reuters the Japanese bank plans to buy them out in a roughly USD 4 billion deal.

Despite the Nikkei's nearly 3% fall last week, market players said bulls were waiting for signs of the Middle East situation calming down to buy on dips, as the factors that fuelled a 14% market rally since November – excess liquidity and stronger corporate earnings - remained largely intact.

"Higher oil prices are stoking worries over higher production costs due to increases in raw materials prices, which in turn could undermine Japanese firms' earnings," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

"Today's drop on the Nikkei, in tandem with the rise in oil prices, shows how jittery players have become about the situation in the region," said Osakabe. He added that the Nikkei's midterm support is seen at its 75-day moving average, now at 10,322.

By midmorning the benchmark Nikkei shed 0.5% or 54.68 points to 10,472.32. The broader Topix fell 0.3% to 939.13.

Mizuho gains

Mizuho plans to buy out minority shareholders in investment bank Mizuho Securities Co, retail broker Mizuho Investors Securities and trust bank Mizuho Trust & Banking, a source with knowledge of the matter told Reuters on Saturday.

"This consolidation should be a good move in the long term as the bank is expected to streamline businesses and cut costs," said Hideyuki Okoshi, general manager at Chibagin Securities. He noted, however, that it was not yet clear how much Mizuho shareholders would be diluted in the financing of the deal.

In Libya, armed rebels who have seized control of Zawiyah, close to the capital Tripoli, were preparing for a counter-attack as Libyan leader Muammar Gaddafi vowed to cling on to his 41-year-old rule.

Unrest in Libya also sparked safe-haven buying of yen. The dollar was slightly weaker against the Japanese currency and in early Monday trade changed hands at 81.70 yen . A stronger yen typically pressures shares of Japan's exporters because it erodes overseas profits when repatriated.

NEC Corp fell 4.3% to 223 yen after it slashed its full-year earnings forecast on Friday, and Goldman Sachs downgraded the stock to "neutral" from "buy" and removed it from its "conviction buy" list.