Tokyo shares lost 0.56% Tuesday morning, paring earlier gains as a lack of progress on crucial U.S. debt negotiations sent the safe-haven yen to a fresh four-month high against the dollar. The benchmark Nikkei index fell 56.71 points to 10,041.01 by the break.
The yen's strength against the U.S. dollar amid the U.S. political impasse fueled selling pressure further on Japanese shares, brokers said. A strong yen erodes exporters' overseas earnings. The dollar bought 77.90 yen in Tokyo, compared with 77.94 yen in New York, at one point falling to a fresh four-month low of 77.82.
Investors remained cautious over the stalled U.S. debt ceiling talks, said Kazuhiro Takahashi, general manager of investment strategy and research at Daiwa Securities.
On Tuesday, the dollar touched a four-month low against the yen in Tokyo after an address to the nation by President Barack Obama failed to indicate any progress on a debt agreement.
Despite the fast-approaching Aug 2 deadline, the White House, Democrats and Republicans have failed to reach a deficit-cutting budget deal. While the two sides agree a default must be avoided, they disagree on how to reduce the deficit, with Democrats wanting to cut some spending and raise taxes but the Republicans vowing to oppose any tax rises.
The U.S. government must raise its $14.3 trillion debt ceiling by Aug 2 so that it can pay its debts. A default by the world's richest country would cause a seismic event on global markets, analysts say, which would likely lead to another financial crisis and worldwide recession.
Obama has described such a scenario as economic "Armageddon."
The president late Monday went on prime time television to warn that the Republicans' unyielding approach to the U.S. debt crisis was a "dangerous game" and urged Americans to press for compromise.
With a potential U.S. default looming, Obama appealed to Americans to "make your voice heard".
However, Hideki Hayashi, global economist at Mizuho Securities, said: "The speech falls short of market expectations that the president might show progress on the ongoing standoff."
If the U.S. defaults on its debt, the value of U.S. Treasury bonds will plummet. Japan is the second largest holder of U.S. Treasury bonds.© 2011 Agence France-Presse