UPDATE: Asian Shares Fall; Japan Erases Rise,China Mkt Drops

SINGAPORE -- Asian stock markets fell Monday, retracing early gains, with Japanese shares sinking after initial euphoria over the opposition's election victory and China's stock markets sharply lower as an upcoming share offering spurred concerns over increased supply.

"Tokyo reacted to the change in government with a big spike up before the reality of their economic situation started to bite," said Macquarie Private Wealth Associate Director David Halliday.

Japan's Nikkei 225 was down 0.1% after initially rising more than 2.0% to its highest intraday level for this year. The early gains were fueled by the Democratic Party of Japan win's of more than 300 of the 480 seats in the Lower House on Sunday, pushing out the Liberal Democratic Party after 54 years of nearly uninterrupted rule.

The election outcome also pushed the Japanese yen sharply higher.

"The questions that linger now is if the DPJ could deliver their lofty election promises and what the results mean for Japan's policies, including foreign relations and foreign exchange policies," said UBS analysts in a note.

Shares in China dropped sharply, with the Shanghai Composite trading down 5.4%, as Metallurgical Corp. of China's share offer aggravated supply concerns and as talk of a slowdown in lending growth continued to weigh on sentiment.

The declines on the mainland weighed on regional stock markets, with Hong Kong's Hang Seng Index shedding 2.1%.

"On one hand, new share supply is hanging over the (Shanghai) market, while on the other, liquidity isn't that supportive as new loan growth may decline further in August," said Wang Junqing at Guosen Securities.

Banks were leading the losers after China Merchants Bank reported a wider-than-expected 38% drop in first-half net profit. China Merchants Bank's A-shares fell 4.5%, while its Hong Kong-listed shares shed 4.0%.

In other markets, Australia's S&P/ASX 200 traded down 0.2% after earlier touching its highest level since October 2008. South Korea's Kospi Composite was down 1.2%, Singapore's Straits Times Index shed 0.9%, Taiwan's Taiex fell 0.5% and Indonesian shares lost 1.7%. New Zealand's NZX-50 slipped 0.4%. Markets in Malaysia and the Philippines were closed.

The Industrial Average's 0.4% slip on Friday also damped regional sentiment. DJIA futures were recently 50 points lower in screen trade.

Japanese exporters were pulled lower by the strength in the yen, with the auto stocks among hardest hit. Toyota Motor was down 1.0%, while Honda Motor fell 1.7%.

Bucking the trend, shares of Japanese baby goods makers gained on the DPJ's win, as the party's policy proposals included allowances for raising children. Pigeon Corp. was up 3.2% and Uni-Charm Corp. 0.6% higher.

In Australia, gains in banks offset declines in some resource plays. ANZ added 4.2% as the growth of loan impairments slowed. National Australia Bank rose 1.6%. But BHP Billiton slipped 0.2% and Rio Tinto lost 1.3%.

Harvey Norman Holdings continued to surge after Friday's strong results, helped by ratings and target-price upgrades from brokers. The shares were up 5.6%

The Korean stock market's fall was led by financial counters. KB Financial was down 2.6% while Woori Finance lost 2.5%.

"I think the stock market needs to take a break after recent sharp gains. Investors will likely spend some time judging whether the pace of the global economic recovery is fast enough to justify the rapid gains in stocks," said Lee Jin-woo at Mirae Asset Securities. But he expected the depth of the correction to be small given the ongoing optimism for local firms' earnings to improve.

Hyundai Steel was up 4.0% after news it had hiked prices of its main steel products, and sold 12.85 million shares of Hyundai Motor to Hyundai Mobis.

In foreign exchange markets, the U.S. dollar was at Y92.63, from Y93.61 in New York on Friday, going below Y93.00 for the first time since July as exporters sold the dollar.

Hideki Amikura, deputy general manager at Nomura Trust and Banking, said the election result was "behind some of the yen-buying this morning, since the DPJ seems more tolerant of a stronger yen as the party is more focused on expanding domestic demand."

He also cited statements on the benefits of a strong yen from "the brain of the DPJ" - key party advisor Eisuke Sakakibara, who was a possible candidate for a government post. Sakakibara is a former top finance ministry currency bureaucrat, and was known as "Mr. Yen" for his ability to move the markets.

Although the landslide win was a watershed event, Brown Brothers Harriman said: "One cannot expect the Mandarins of the bureaucracy to simply roll over for the incoming government, so important drivers for the yen in the period ahead will likely be the generalized risk-appetite of global investors and the machinations around the fiscal half year end for Japanese companies."

The yen was also gaining ground against the euro, which was at Y132.38, from Y133.86 in New York. The single currency was lower against the U.S. dollar at $1.4288 from $1.4300.

The Japanese government bond market was supported by the downturn in the Tokyo stock market. The 10-year cash JGB yield was down one basis point at 1.295%, and the lead JGB futures contracts was up 0.17 at 139.20.

Spot gold was down $1.60 at $954.00 per troy ounce from New York Friday. The October Nymex crude oil futures contract down 45 cents at $72.99 per barrel on Globex.

LME base metals were not being quoted in electronic markets as the London Metals Exchange is shut on Monday, for a U.K. bank holiday.