(Reuters) - The Nikkei average fell on Tuesday as companies heavily exposed to China were caught up in tensions between China and Japan over a territorial dispute that disrupted business and production, and left investors pondering unsettled scenarios.
Should the anti-Japanese protests in China worsen or the dispute over the islands escalate, China-related companies would likely see further sell-offs as their earnings from the world's second-largest economy could come under pressure.
But were the matter resolved quickly, analysts said, Tuesday's sell-off in some China-exposed names would give investors a handy buying opportunity.
"Chinese factors have two aspects: if the situation prolongs, then it would weigh on the Nikkei and if the problem is resolved soon, it would spur a buy-back," said Masayuki Doshida, senior market analyst at Rakuten Securities.
The Nikkei share average .N225 ended 0.4 percent to 9,123.77 after rallying 1.8 percent on Friday after the U.S. Federal Reserve launched its QE3 round of stimulus. Monday was a public holiday in Japan.
"The concerns are what, if anything, these Chinese protests turn into," said a senior dealer at a foreign brokerage said.
Investor demand for put options outpaced demand for calls. Societe Generale analysts said most popular put options on the Nikkei with an October maturity had a strike price at 8,250 JNI082V2.OS, nearly 10 percent below Tuesday's close.
The next most-traded was a put option at 8,750 JNI087V2.OS, followed by a call at 9,500 JNI095J2.OS and another put at 8,000 JNI080V2.OS.