Banking worries cloud Japan

JAPANESE stocks gave back many of Tuesday's big gains today as investors worried that complacency about the state of the country's banks was growing on the back of the 25% climb in the Nikkei 225 since the beginning of February.

It shed 243 points to 11,549.12 as most other Asian markets were cheered by the US Federal Reserve's verdict that a significant recovery was now under way in America.

The strengthening demand already seen in the US lifted Japanese exports for the second month, but the 1.6% increase from January's number failed to impress economists, who pointed out that most of Japan's growth is domestically driven.

Other figures showed that demand for services in the country underlined the precarious state of the economy, but this did not force any action from the Bank of Japan, which ended a two-day meeting with monetary policy unchanged despite strong political pressure to pump more cash into the system.

Bank shares took a beating on reports that the rise in the stock values will dramatically reduce the losses on their massive shareholdings at the end of this month. UJF Holdings, the country's second-largest lender, had slumped more than 6% by mid-morning on fears that the cutting of losses will once again defer the long awaited reforms and bad debt write-offs.

Shares of Sanyo electric shares tumbled 6% after the company lowered its full-year net earnings forecast from 13bn yen (£71m) to 1.5bn yen.

Hong Kong shares also fell as investors ignored the Fed's bullish statements and fretted that any rise in interest rates later this year will further hammer the struggling economy. The Hang Seng index lost 186.6 to 11,036.2 as banks and other blue-chips slid back. Higher interest rates are the last thing Hong Kong needs, say analysts, as it fights its own deflation, which has put real interest rates up to around 9%.

If US rates fall, the Hong Kong dollar's peg to the US greenback will ensure that the local cost of money instantly rises, so putting the brakes on any domestic recovery. HSBC Holdings fell HK$2.50 to HK$91.25 as the shares went ex-dividend, but investors were also concerned that its local earnings growth will be hampered later in the year.

A Reuters survey which predicted that the growth in South Korea's economy was set to accelerate from 3% last year to 5.2% kept stocks stoked and the Kospi rose 3.98 to 893.96. It is now heading for 900, according to local enthusiasts. Korean technology stocks were also boosted by the improving US outlook, which lifted chipmakers in Taiwan, where the Weighted Average index jumped 137.46 to 6044.19.

Profit-taking took the edge off Singapore stocks after recent strong rallies and the Straits Times index slipped 10.6 to 1797.8. Sydney stocks strengthened for the third day as investors looked to the US economy and shrugged off the growing certainty that their own interest rates are back on the way up. The All Ordinaries index gained 61.7 points to 3467.3.

In Malaysia, the Kuala Lumpur Composite added 0.95 to 755.22, the SET index in Thailand put on 2.03 points to 377.93 and the Jakarta Composite rose 3.05 to 474.70.