Nikkei hits 3-1/2-month low as hopes of early resolution to U.S.-China standoff fade

* Nikkei closes at 3-1/2-month low, defensive shares hit
* Investors grow pessimistic on U.S.-China trade

By Hideyuki Sano
TOKYO, May 30 (Reuters) - Japan's Nikkei share average
closed at a 3-1/2-month low on Thursday, on growing anxiety the
trade dispute between the United States and China will be
prolonged and damaging to the economy.
The Nikkei .N225 fell 0.29% to 20,942, its lowest close
since mid-February. It earlier declined as much as 0.92% to
20,809, edging near its May 14 intraday low of 20,751.
"A rebound around that level will lead to formation of a
double-bottom and could underpin the market," said Masayuki
Doshida, senior market analyst at Rakuten Securities.
But a break below that line, which will take the Nikkei to
the lowest levels since mid-February, will further impact
already weak market sentiment, he added.
The broader Topix .TOPX slipped 0.29% to 1,531.98, its
lowest finish since Jan. 11.
Despite the downturn, the Japanese share market has fared
better than many of its global peers. MSCI Japan .MIJP00000PUS
has shed 3.7% so far in May, less than the 5.6% fall in MSCI
ACWI .MIWD00000PUS , on course to mark their first
outperformance for this year.
Yet that was of little comfort to investors, who have become
increasingly pessimistic that the United States and China could
strike a trade deal on the sideline of a G20 summit meeting in
late June.
"There will be limited hopes on any deals for the time
being. It will be a prolonged fight," said Tsuyoshi Shimizu,
head of research group at Asset Management One.
Investor appetite remains subdued even as the dividend
yield on Topix is reaching to highest levels in almost seven
years at 2.54 percent
In strongly worded commentaries, Chinese newspapers warned
on Wednesday that Beijing is ready to use rare earth elements to
strike back in a trade war with the United States. Defensive shares, including domestic demand-led companies,
came under heavy selling in Thursday's trade, with Astellas
Pharma 4503.T dropping 4.2% and Kao Corp 4452.T ,
manufacturer of cosmetics, soaps and other chemical products,
sliding 1.8%.
Soy sauce maker Kikkoman 2801.T and ketchup maker Kagome
2811.T both fell 4.2 percent, hitting one-year lows and
2-1/2-year lows respectively.
Recruit Holdings 6098.T , one of a small number of shares
that have posted gains so far this month, fell 2.6 percent while
East Japan Railway 9020.T shed 1.2%.
Trading was slow with the main board's turnover at 1.922
trillion yen, about 20 percent below the average and the second
lowest this month.

(Editing by Shri Navaratnam)