Japans Nikkei drops on Iran risks but weaker yen limits losses

By Kevin Buckland

TOKYO, - Japan's Nikkei share average fell on Monday as U.S. attacks on Iranian nuclear sites fueled risk aversion, while the accompanying jump in oil prices weighed on the outlook for Japan's economy and corporate earnings.

The Nikkei sank 0.55% to 38,191.87 as of the midday recess, with 161 of its components declining, versus 60 that rose and four that traded flat.

The broader Topix slumped 0.62%.

Japan imports almost all of its oil, making the economy highly sensitive to crude prices, which surged to six-month peaks on Monday as traders waited nervously to see Iran's response to the U.S.'s entry into the conflict. Japanese manufacturers are also vulnerable to energy price spikes.

At the same time, analysts pointed to the yen's decline to a nearly six-week low versus a broadly stronger U.S. dollar as providing some support to shares in Japan's heavyweight exporters, whose overseas revenues gain in value when the yen weakens.

"The rise in the dollar-yen interest rate has been very clearly helpful for the Nikkei's performance," said Yunosuke Ikeda, chief macro strategist at Nomura Securities.

The safe-haven yen is weakening because "investors seem more focused this time on the impact of higher oil prices on Japan's trade balance," Ikeda said.

Chip-sector stocks underperformed, with Screen Holdings falling 3.76% to be the Nikkei's biggest decliner in percentage terms, while Tokyo Electron and Advantest were the biggest drags in index-point terms with respective declines of 2.42% and 1.69%.

The best performing stocks were oil explorers and refiners, with the Topix mining sub-index climbing 1.49% and the oil and coal sub-index adding 0.51%.

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