Japan shares close down on banks merger talks as optimism failed to spread beyond the financial sector. 
The Nikkei 225 average was off 2.2% at 11,356.65, while the broader Topix dropped 1.3%.

MTFG and UFJ soared on news of merger talks between the two banks on Wednesday.  Both MTFG and UFJ were suspended in morning trade after it emerged that the banks were in talks over a possible merger, but once trading resumed in the afternoon, MTFG rose 7.4 per cent to Y1,030,000 and UFJ was up 10.6 per cent at Y522,000.

A merger between the two banks would create the world’s largest bank with assets of Y190,000bn. The potential deal would mark the most significant development in Japanese banking reform since the country created its four so-called mega-banks - Mizuho, SMFG, MTFG and UFJ.

Of the other two mega-banks, SMFG rose 1.4 per cent to Y724,000 but Mizuho dropped 0.7 per cent to Y460,000.

Shares of UFJ’s biggest borrowers rallied in the morning on hopes a merger could save them from painful restructuring enforced by their bank, but then fell as the market considered the possibility that MTFG, which has a good record of loan disposals, could put them under intensified pressure.

Shares of Daiei, the heavily-indebted retailer that is one of UFJ’s leading borrowers, initially surged 9 per cent but closed down 2.5 per cent at Y314. 

Shares of technology shares were lower on jitters ahead of key US earnings results. Sony shed 0.8 per cent to Y3,990 and Canon was off 1.1 per cent at Y5,640.

Shares of Advantest, a maker of chip-equipment, were off 4.5 per cent at Y6,440 and Tokyo Electron was off 4.5 per cent at Y5,370, ahead of Intels second-quarter earnings results on Thursday.