* Markets with monetary easing options tend to outperform - analysts
* Japan left with few ammunition in case of recession - analyst
* Toyota, Honda outperform on report China shifts to hybrid cars
By Ayai Tomisawa
TOKYO, July 16 (Reuters) - Japan’s Nikkei fell on Tuesday as slowing economic growth in China hurt investor sentiment, but automakers outperformed on a media report that China will rely more on hybrid vehicles.
The Nikkei share average dropped 0.7% to 21,526.21 points by midmorning. Japanese markets were closed on Monday for a national holiday.
On Monday, China released data showing its economic growth slowed to 6.2% in the second quarter, its weakest pace in at least 27 years, as demand at home and abroad faltered in the face of mounting U.S. trade pressure.
While more upbeat June factory output and retail sales offered signs of improvement, some analysts cautioned the gains may not be sustainable, and expect Beijing will continue to roll out more support measures in coming months.
Traders said that a slowdown in the world’s second-largest economy would make the performance gap between Japanese equities and its peers even wider as Japan has little policy ammunition left to support a faltering economy.
Japan’s economy expanded an annualised 2.1% in the first quarter but many analysts predict growth will slow in the coming months as the U.S.-China row hurts exports.
“Markets whose central banks step up monetary easing tend to outperform these days,” said Norihiro Fujito, a chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“While the Federal Reserve and the European Central Bank are all loosening monetary policies to support their economies, the Bank Of Japan is not left with much choices. Foreign investors are aware of this so they are leaving Japan to shift their money to the U.S. and emerging markets.”
The Nikkei has gained 7.6% this year, while the S&P index soared 20% and the European pan-region benchmark index gained 11%.
Investors sold futures, triggering index-heavy names such as SoftBank Group, FamilyMart and Fanuc Corp to fall 1.2%, 2.8% and 1.2%, respectively.
But automakers outperformed after the Nikkei business daily reported that the Chinese government is set to shift its automotive strategy to rely more on hybrid vehicles.
The Nikkei said the move is part of the country’s efforts to clean up the environment, instead of centring solely on electric vehicles, a development likely to work in favour of Japanese automakers such as Toyota Motor and Honda Motor .
Toyota rose 1.2%, while Honda shed 0.3%.
The broader Topix dropped 0.6% to 1,566.58. (Editing by Kim Coghill)