* Hitachi sags after cutting forecast * Japan Airlines gains, f'cast hike offsets Dreamliner losses * Fast Retailing weighs after poor January sales By Sophie Knight TOKYO, Feb 5 Japan's Nikkei share average dropped in early trade on Tuesday as investors took signs of strife in peripheral euro zone countries as a cue to lock in profits following five straight days of gains. Hitachi Ltd was in the firing line, shedding 5.6 percent after the industrial machinery firm sliced 13 percent off its full-year operating profit outlook, citing sluggish demand in Europe and a slowdown in emerging markets. But Japan Airlines Co Ltd was in favour, jumping as much as 7.6 percent to its highest level since it went public last September, after the airline hiked its operating profit forecast by 12.7 percent to 186 billion yen ($2 billion) for the year to March 31. The airline estimated the impact on its earnings from the grounding of Boeing's Dreamliner jet at around 700 million yen ($7.55 million) for the rest of this fiscal year, but said it will discuss compensation with Boeing. The Nikkei lost 1 percent to 11,151, backing away from a 33-month closing high of 11,260.35 hit on Monday, after concern about the euro zone debt crisis flared due to calls for the Spanish prime minister to resign due to a corruption scandal and news of a probe of alleged misconduct involving an Italian bank three weeks before national elections. "There will only be a spurt of profit-taking in reaction to this kind of news because it's just one small piece of a very long and drawn-out crisis," said Toshiyuki Kanayama, senior market analyst at Monex. "But the U.S. fell off highs and the Nikkei is also begging for a fall after rising for five straight days." Profit-taking meant some of the most sluggish stocks on Tuesday morning were those that have seen sharp gains over the past 2-1/2 months on hopes that Prime Minister Shinzo Abe's brand of aggressive monetary and fiscal policy will reinvigorate the economy. The real estate sector, which has soared around 31 percent since mid-November, dropped 2.5 percent, while the insurers' sub-index, which shot up 46 percent over the past 2-1/2 months, lost 2 percent on Tuesday morning. "The market has been moving on expectation or speculation for months, but investors might start looking at the here-and-now soon," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities. "Companies that would benefit from a return to inflation - insurance, real estate and banks - might cool down because that hasn't actually happened yet, while the winners from a weaker yen will remain in focus because that's very real," he added. The yen moved further off a fresh 33-month low hit on Monday morning of 93.185 against the dollar, to 92.46 by Tuesday morning. The Japanese currency's 14 percent slide since mid-November has propelled up exporters, whose overseas revenues will be swollen by a softer yen. While investors are optimistic about future profits, weakness in the yen came too late to much improve results from the last quarter, with about two-thirds of the 88 Nikkei companies that have reported so far this earnings season missing analysts' estimates, according to Thomson Reuters Starmine. Sakagami of SMBC Nikko Securities said companies with a higher proportion of sales from the domestic market may be somewhat sidelined as demand slows at home and signs of inflation still seem a long way off. Index heavyweight Fast Retailing Ltd, the operator of the Uniqlo clothing chain, said domestic sales fell 5.5 percent in January from a year earlier, citing fewer weekend days in the month. Its stock fell 2.3 percent, taking 23.1 points off the benchmark. The broader Topix edged down 0.4 percent to 951.91.
The Pentagon releases photographs linked to allegations of abuse of detainees in Iraq and Afghanistan.