* Yen's advance against dollar hits exporters
* Banks drop as brokerage lowers sector stance, ratings
By Elaine Lies
TOKYO, Sept 9 (Reuters) - The Nikkei stock average fell 1.2 percent on Wednesday, with Canon Inc and other exporters hit by a stronger yen while bank shares slid after a brokerage downgraded two of Japan's megabanks.
J.P. Morgan cut its ratings on Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group to "neutral" from "overweight" and lowered its sector stance to "slightly bearish" from "neutral".
Additional pressure came from losses in Chinese shares, with Hong Kong's Hang Seng Index down 1 percent and Shanghai off 0.3 percent.
"There's been a lot of concern about the yen's strength this week, and also today we're seeing selling of bank stocks -- apparently by overseas investors -- after the downgrade," said Hiroaki Kuramochi, head of the equity division at Tokai Tokyo Securities.
"At least one reason the Nikkei will find it hard to break above 10,500 is this selling of financial shares."
The yen's strength has been a major trading factor for the Nikkei this week, after the Japanese currency hit a seven-week high last week. The yen has been above levels expected by major manufacturers for the current financial year since late August, raising worries about corporate earnings.
The dollar was steady against the yen at 92.28 yen, near a seven-week low of 91.94 yen hit last week.
"The yen is showing signs of strengthening again ... If the dollar falls below 92 yen the impact may be big and such concerns are weighing on stocks," said Yutaka Miura, senior technical analyst for Mizuho Securities.
The average exchange rate for the dollar versus the yen expected by major manufacturers for the year to March 2010 was 94.85 yen, with 94.77 yen expected for the second half, Bank of Japan data shows.
The benchmark Nikkei lost 129.03 points to 10,264.20, while the broader Topix slid 1.1 percent to 936.49.
Mitsubishi UFJ Financial Group shed 3 percent to 527 yen, Sumitomo Mitsui Financial Group fell 2.4 percent to 3,620 yen and Mizuho Financial Group lost 2 percent to 200 yen.
The banking subindex underperformed the Nikkei, falling 2.1 percent.
Among exporters, Canon fell 3.3 percent to 3,470 yen and Honda Motor Co slipped 2.6 percent to 2,850 yen. Toyota Motor Corp lost 1.8 percent to 3,800 yen.
But apparel maker Renown Inc soared 15.3 percent on news that it was selling Aquascutum, a loss-making 158-year-old raincoat maker, to another British luxury fashion brand, Jaeger, for an undisclosed sum. (Additional reporting by Masayuki Kitano; Editing by Chris Gallagher)