nikkei 20 year lows and sub 8000 imminent

TOKYO, March 9 (Reuters) - Tokyo stocks could plumb new

20-year lows this week as war worries and a host of domestic

factors discourage buyers.

Analysts said the Nikkei average <.N225> could drop below

8,000, a key support level, after falling 2.62 percent last week

to 8,144.12 -- its lowest close since March 1983.

"Investor appetite has dried up, so I won't be surprised if

the Nikkei falls below the 8,000 mark," said Reiko Nakayama, head

of the investment strategy division at Marusan Securities.

Some investors may look for bargains early in the week, but

the market's longer-term prospects are clouded by the prospect of

a trade-disrupting war on Iraq, worries about North Korea's

missile and nuclear programmes, and a weak economic outlook.

News that major market player Nikko Salomon Smith Barney --

owned by Citigroup and Nikko Cordial Corp <8603.T> -- had

been cited for stock manipulation will add to the gloom.

Shares of Nikko Cordial, Japan's third biggest broking house,

dropped 12 percent when the news broke on Friday.

Analysts said the Nikkei is likely to move between 7,800 and

8,350 this week.

The further prices fall, the more Japanese banks and private

pension funds are expected to dump shares in the run-up to the

end of the fiscal year on March 31.

Also, global fund managers, who have been buying Japanese

shares since the start of this year, are now locking in profits,

triggering falls in issues such as Nippon Steel Corp <5401.T>.

"People pay little attention to economic fundamentals now.

The focus has narrowed to whether the Iraq issue will send the

market to a new low or not," said Yutaka Miura, deputy manager of

Shinko Securities' equity information section. "The mood here

will likely follow the ups and downs on Wall Street."



THIS TIME MAY BE DIFFERENT

In 1991, the Nikkei surged 17 percent in a six-week "relief

rally" that began with the onset of the U.S.-led campaign in

Iraq. The U.S. Standard & Poor's 500 Index rose 18 percent.

But traders said stocks may fall this time if Washington

presses ahead with a war without the support of key allies.

On Friday, the Dow Jones industrials average <.DJI> closed up

0.86 percent at 7,740.03 on the hope that a March 17 deadline for

Iraq to meet disarmament demands could help resolve the crisis.

With only three weeks to go before year-end book-closings for

most Japanese companies, the drop in share prices is bad news for

banks, which are saddled with mountains of bad loans, as lower

valuations on their stock holdings will erode their capital.

Analysts say many banks' capital adequacy ratios -- a key

gauge of financial health -- could fall below the eight percent

global requirement if the Nikkei approaches 7,500.

At Friday's close, combined unrealised stock losses at the

top seven banking groups stood at around 5.84 trillion yen ($50

billion), according to Daiwa Institute of Research.

Investors are also concerned about the ability of Prime

Minister Junichiro Koizumi to deal with any financial crisis.

Friday's arrest of Takanori Sakai, a member of the ruling

Liberal Democratic Party, was the latest of a series of political

scandals to embarrass reformist Koizumi, whose popularity is

fading ahead of nationwide local elections in April.

Sakai is alleged to have breached political funding laws.

"I don't think we should immediately change our basic views

that the Nikkei will stay between 8,200 and 9,200, the range it

has been caught (in) for five months or so," said Yorinobu Hara,

general manager at Resona Asset Management.

"A fall to 8,000 would be a negligible error. But a political

vacuum is a worry because that means Japan has neither economic

nor foreign policy (to deal with a possible crisis)."