* Nikkei down 1.2 pct by midafternoon, extends losses
* Banks lower on procurement cost concerns, profit-taking
* Canon sinks, Komatsu climbs after earnings
By Antoni Slodkowski and Ayai Tomisawa
TOKYO, Jan 28 (Reuters) - The Nikkei average fell after a
cut to Japan's sovereign debt rating, with some analysts saying
the downgrade may become a turning point for foreigners who have
led a rally in the benchmark since November.
Standard & Poor's downgrade of a notch triggered a sell-off
in financial shares on concerns they might be exposed to higher
procurement costs.
"It looks like investors are offloading their positions on
banks because they were reminded of the dire state of Japan's
public finances, but I don't think this is going to last very
long," said Hiroaki Kuramochi, chief equity marketing officer at
Tokai Tokyo Securities.
"Securities stocks as well as real estate shares -- those
stocks that have recently outperformed -- are also being sold as
investors used the downgrade as an excuse to lock in profits."
The banking sector <.IBNKS.T>, has gained 18 percent over
the last three months, outperforming a 13 percent rise in the
broader market on the back of aggressive buying by foreign
investors who added underweight banking shares to their
portfolios.
But the cut to Japan's long-term debt rating by one notch to
AA minus on concerns the government lacked a coherent plan to
tackle mounting debt, also led to broad losses for the yen,
which lifted shares of exporters.
Sony Corp <6758.T> was flat at 2,915 yen and Nikon Corp
<7731.T> gained 0.8 percent to 1,953 yen.
By midafternoon the benchmark Nikkei <> was down 1.2
percent at 10,348.65.
The broader Topix <> fell 1.2 percent to 918.77.
ADVANTEST, FANUC WEIGH
Adding to the Nikkei's decline were stocks with high
weightings in the index. Fanuc Ltd <6954.T>, whose weight stands
at 4.9 percent, according to Thomson Reuters data, fell 2.6
percent to 12,910 as investors locked in profits after the stock
surged the day before on strong October-December earnigns.
Advantest <6857.T>, with a 1.4 percent weighting in the
Nikkei, plunged 6.7 percent to 1,721 yen after its full year
operating profit estimate of 6.5 billion yen came in below an
average estimate of 10.6 billion yen in a poll of 13 analysts by
Thomson Reuters I/B/E/S.
The market was also pulled lower by commodity shares as
prices of oil, gold and most crops fell on Thursday after weak
U.S. job and manufacturing indicators made investors worry about
how demand for raw materials would fare in a struggling economy.
Inpex Corp <1605.T>, Japan's largest oil and gas developer
shed 2 percent to 522,000 yen.
The S&P move matched an earlier ratings cut by Fitch and
raised concerns about the risks of downgrades for other
developed economies. []
"The rating reflects the country's current fiscal position.
Therefore funds that have been overweight on Japan since last
November may reconsider their position," said Norihiro Fujito, a
senior investment strategist at Mitsubishi UFJ Morgan Stanley
Securities.
Foreigners represent over 60 percent of investors on the
Tokyo market.
Downbeat earnings also hurt the benchmark, with digital
camera maker Canon Inc <7751.T> dropping 3.6 percent to 4,045
yen after its operating profit for October-December was 10
percent lower than a year earlier.
Komatsu Ltd <6301.T> jumped 2.3 percent to 2,502 yen after
the construction machinery maker said its net profit in the nine
months to Dec. 31 surged more than five times from a year
earlier to 100.6 billion yen ($1.2 billion) on strong sales in
China and other emerging markets.
Banks underperformed, with Mitsubishi UFJ Financial Group
<8306.T> falling 2.7 percent to 434 yen, Mizuho Financial Group
<8411.T> dropping 3.1 percent to 169 yen and Sumitomo Mitsuo
Financial Group <8316.T> shedding 2.3 percent to 2,851 yen.
"Although a downgrade of government debt is not in itself a
big surprise, it's triggering concerns about banks' rising fund
procurement costs," said Masahiko Sato, executive director of
product marketing department at Nomura Securities.
(Additional reporting by Takeshi Yoshiike and Antoni
Slodkowski; Editing by Joseph Radford)
