Tokyo: The Nikkei average fell on Tuesday after Standard & Poor's cut Italy's debt rating and worries about the global impact of continued financial turmoil in the euro zone mounted, but caution ahead of a US Federal Reserve meeting limited losses.
S&P downgraded its rating on Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise that threatens to add to concerns of contagion in the debt-stressed euro zone.
The Nikkei remained above support at 8,732, the settlement price for September Nikkei futures and options. But it dipped below its 25-day moving average of 8,756 after trading above it earlier in the session.
"The market is focusing on the European situation, and also taking some direction from other Asian stock markets, with caution ahead of the Fed meeting preventing big moves, which is limiting losses," said Yumi Nishimura, senior technical analyst at Daiwa Securities.
She said it was a positive signal that nine foreign securities houses were net buyers before the start of trade on Tuesday, after foreign institutions have mostly been net sellers of Japanese shares since August.
But Tuesday's buy orders were likely placed before S&P's announcement about Italy.
"Investor attention is turned to Europe because there are still unexpected developments emerging there, whereas the FOMC meeting is probably already factored into most positions," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.
The US central bank will likely take some further easing steps at its two-day meeting beginning on Tuesday.
Instead of a third round of bond purchases, or QE3, many analysts believe the Fed is likely to opt for Operation Twist, in which the Fed would either replace maturing short-term debt with longer-dated bonds or actively sell short-dated assets for longer-dated paper, aiming to push down longer-term interest rates.
The Nikkei had dropped 1.4 per cent by the midday break to 8,739.74. The broader Topix index declined 1.5 per cent to 756.42.
Volume was thin, with 642 million shares changing hands on the Tokyo Stock Exchange's main board. That suggests full-day volume will fall short of last week's average of 1.75 billion shares.
Shares of Mitsubishi Heavy Industries Ltd fell 2.7 per cent to 320 yen after Japan's biggest defence contractor said hackers accessed its computer system and could have stolen information.
Suzuki Motor shares climbed 4.3 per cent to 1,679 yen after German magazine Der Spiegel reported on Sunday that Volkswagen could make a move to take over the Japanese automaker, though an analyst said a hostile takeover is unlikely.
Elpida Memory rose 1.6 per cent to 584 yen after Goldman Sachs raised its target price to 750 yen from 570 yen and upgraded the company to "buy" from "neutral", saying the DRAM market is close to bottoming out.
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