Nikkei drops below 9,000 to two-week closing low

Japan's Nikkei average fell below 9,000 to a two-week closing low on Thursday as hopes that US Federal Reserve Chairman Ben Bernanke will signal more stimulus in his speech on Friday faded, while resources-related shares slid on a weaker outlook.

Wednesday's stronger-than-expected US housing figures reduced the likelihood of a new round of bond purchases by the Fed, which some investors have been pinning their hopes on to buoy markets just as the Chinese economy is flagging.

Concerns over China have been weighing on prices of steel and iron ore as well as shipping freight rates. Japanese steelmakers and shippers shed 2.7 and 1.8% respectively on Thursday.

Construction machinery makers Komatsu Ltd dropped 3.9% and Hitachi Construction Machinery Co Ltd lost 2.6% on worries that mining companies may further cut capital expenditures as iron ore prices hit their lowest since late 2009.

The Nikkei shed 1% to 8,983.78, but held above its 200-day moving average at 8,977.15.

"Simply put, there are no lights at the end of the tunnel for the global economy yet," said Yuuki Sakurai, CEO of Fukoku Capital Management.

"The very least Bernanke could do is ease a little, but even if he does it's not a magic wand and won't necessarily improve the global economy."

Bernanke has used the economic symposium in Jackson Hole, Wyoming in the previous two years to signal further easing.

The Nikkei volatility index climbed 7.4%. The higher the volatility index, the lower the risk appetite.

Banking on a quick fix from the European Central Bank to bring down punishingly high borrowing costs for Spain and Italy and another round of stimulus from the Fed, the Nikkei has risen 7.9% since it hit a seven-week low on July 25.

The benchmark is up 3.3% this month, on track for its best August performance since 2006, b ut September tends to be the weakest month for the Nikkei, with an average monthly drop of 1.2% between 1971 and 2011.

Bearish on Equities

A Reuters poll of 10 Japan-based fund managers lifted their bond allocation to a record high in August while cutting stocks to a 14-year low, as they fret over the slowdown in the global economy on top of concerns about Europe.

The latest capital flow data from Japan's Ministry of Finance also showed foreign investors returned to net selling of Japanese equities last week after snapping a seven-week selling streak the previous week.

"The contribution from real money investors is very small: fast money enjoying some spread on Nikkei futures are the kind of traders I can basically see today," said Kyoya Okazawa, head of equities and commodity derivatives at BNP Paribas in Tokyo.

The broader Topix index dropped 0.8% to 743.79. Trading volume was light at just 83% of the 90-day daily average.

Retailers came under pressure after data showed Japanese retail sales fell 0.8% in July on a year earlier. Convenience store operator Seven & I Holdings Co Ltd eased 2%.

Other losers included Kyowa Hakko Kirin Co Ltd, which sagged 4% after the drugmaker, which holds development rights to US biotechnology company ArQule Inc's cancer drug in parts of Asia, suspended patient enrollment in a late-stage trial to treat lung cancer.

ArQule is developing the drug with another Japanese drugmaker Daiichi Sankyo Inc, which lost 2.4%.

Mobile phone operator Softbank Corp bucked the weak trend, up 1.6^ after Nomura Securities lifted its price target, saying it expected stronger medium-term growth.