ASIA MARKETS: Japan Stocks Hit In Volatile Trade; China Slides

By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) -- Japanese shares beat a sharp retreat after opening comfortably higher on Friday, with a wave of selling ahead of weekend elections in the country also dragging on other regional markets.

The Nikkei Stock Average ended 1.5% lower after witnessing extreme volatility during the session. The benchmark rose nearly 1% in the morning session before suffering heavy losses that dragged the benchmark down to a loss of 2.7% at one point, which traders attributed to selling in the futures market but not related to any particular news.

"It's just positioning. ... The market was long, and the Nikkei Stock Average has failed to break significantly higher despite the fact that the Standard & Poor's 500 breached its May highs. ... [The rule for traders is], if you don't like the move, you get out," said Ben Collett, head of Asian equities at Sunrise Brokers.

"There was no smoking gun that we could see, although looking at volumes in the futures market in the two hours when we saw the cash market fall, 55,800 contracts were traded, which is huge, given the average for each whole day has been 54,000 contracts," said Chris Weston, chief market strategist at IG Markets.

Meanwhile, the Shanghai Composite tumbled 1.5% amid lingering worries over the economy and the lack of policy action to stimulate growth.

Australia's S&P/ASX 200 lost 0.4% and South Korea's Kospi ended 0.2% lower, while Hong Kong's Hang Seng Index inched up 0.1%.

The volatility in Tokyo came ahead of the country's upper house elections this weekend, in which the ruling Liberal Democratic Party is expected to easily clinch a majority. The LDP already has a majority in the lower house of the parliament, and a majority in the upper chamber of the Diet would strengthen Prime Minister Shinzo Abe's government in its attempt to revive the Japanese economy.

However, "it will not be plane sailing once the voting is out of the way. The politicians could be forgiven for putting off difficult decisions until after the elections, but hard choices will have to be made soon to maintain the markets' confidence," Capital Economics wrote in a report.

Regional markets began the day on a positive note after the Dow Jones Industrial Average (DJI) and the Standard & Poor's 500 Index (SPX) ended at record highs Thursday on Wall Street.

Those gains came after the second day of congressional testimony from Federal Reserve Chairman Bernanke and some upbeat earnings results, including from Morgan Stanley (MS). Moody's Investors Service also lifted its outlook on U.S. credit ratings to stable, while reaffirming the country's AAA sovereign rating.

Stocks across sectors were affected by the volatility in Tokyo trading. Shares of Tokyo Electron Ltd. (TOELY) slumped 5.7%, Tokyo Electric Power Co. (TKECY) sank 1.2%, and Isuzu Motors Ltd. (ISUZY) fell 2.1%, with each of them reversing early gains.

Sharp Corp. (SHCAY) came off early highs but ended up 0.9% after the Nikkei newspaper reported it was considering raising funds via a private placement to Lixil Group Corp. and Makita Corp. .

Shares of Lixil added 0.8%, and Makita fell 2.4%.

Hong Kong shares were supported as heavyweight stock HSBC Holdings PLC (HBC) rose 1.2% after the higher finish on Wall Street.

But Chinese property developers suffered big losses, with China Overseas Land & Investment Ltd. (CAOVY) sliding 2.1% and Beijing North Star Co. sliding 2.9% in Hong Kong. On mainland Chinese bourses, Poly Real Estate Group Co. skidded 5.6% in Shanghai and the yuan-denominated A-shares of China Vanke Co. fell 5.5% in Shenzhen.

Santos Ltd. fell 3.7% after reporting a decline in production and cutting forecasts for oil and gas output.

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