Japanese Stocks Drop After U.S. Subprime Crisis Curbs Earnings

By Patrick Rial

Oct. 22 (Bloomberg) -- Japanese stocks slid on mounting evidence the U.S. subprime crisis is curbing earnings and slowing growth in the world's biggest economy.

Mitsubishi UFJ Financial Group Inc., Japan's largest publicly traded lender, led declines by financial shares after Wachovia Corp. said loan defaults reduced profit. Canon Inc., which gets three quarters of its revenue abroad, fell after the dollar tumbled against the yen and after earnings at companies including 3M Co. pointed to a worsening U.S. economy.

Stocks also declined after Cheyne Finance Plc and Rhinebridge Plc, two structured investment vehicles, or SIVs, that bought securities backed by home loans, defaulted on more than $7 billion of debt. The Standard & Poor's 500 Index and Dow Jones Industrial Average both lost 2.6 percent, the worst drop in two months.

``Last week's drop in New York reconfirmed that the subprime problem is at the heart of'' current market weakness, said Norihiro Fujito, a senior strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``The collapse of the off-balance sheet SIVs points to just how deep this problem runs, so financial shares will be in for a rough day.''

The Nikkei 225 Stock Average declined 473.57, or 2.8 percent, to 16,340.80 as of 9:42 a.m. in Tokyo. The broader Topix index tumbled 40.53, or 2.6 percent, to 1,550.75. All 33 industry groups included in the broad gauge fell.

Mitsubishi UFJ lost 31 yen, or 3 percent, to 996. Mizuho Financial Group Inc., the second-largest publicly traded bank, tumbled 28,000 yen, or 4.6 percent, to 588,000, the lowest since Aug. 2005.

Wachovia Earnings

Wachovia reported its first earnings decline in six years on Oct. 19 and missed analysts' estimates after a record $1.3 billion of writedowns for bad loans and mortgage-backed securities.

Rhinebridge Plc, an SIV set up by IKB Deutsche Industriebank AG, was in default on its debt after missing payments, Fitch Ratings said on Oct. 19. An SIV fund run by London-based Cheyne Capital Management Ltd. will stop paying creditors, receivers said.

SIVs, which borrow in the commercial paper market to fund purchases of asset-backed securities, have been forced to sell assets as investors balked at financing their investments.

Exporters dropped after U.S. companies outside the financial industry reported worsening earnings, indicating that the subprime loan problem is spreading to other parts of the economy and could lead to reduced demand.

Yen Strengthens

Canon, the world's largest maker of digital cameras, fell 170 yen, or 2.9 percent, to 5,760. Honda Motor Co., which generated 55 percent of its sales in North America last year, plunged 160 yen, or 4.2 percent, to 3,670. Toyota Motor Corp., the world's biggest automaker by market value, slid 240 yen, or 3.8 percent, to 6,020.

In the U.S., 3M Co., the maker of 50,000 products from Post- it Notes to electronic road signs, reported sales growth that trailed analyst estimates, helping send the shares to their steepest decline in 15 months. Honeywell International Inc., the world's largest maker of aircraft controls, warned profits may be reduced in the future because of a slowdown in the U.S. housing and auto markets.

The yen climbed to as high as 113.26 against the dollar today, the strongest level since Sept. 10 and recently traded at 113.43. Japan's currency traded at 114.99 versus the dollar at the close of trading on Oct. 19.

Seiyu Ltd., a Japanese supermarket operator, was untraded after the shares were suspended following an NHK report that Wal- Mart Stores Inc. may acquire the 50 percent of the company it doesn't already own.

Nikkei futures expiring in December slid 2.9 percent to 16,330 in Osaka and lost 3 percent to 16,280 in Singapore.

In other Asian markets open for trading, Australia's S&P/ASX 200 Index dropped 2.3 percent and South Korea's Kospi index plunged 4 percent.