* Policy concerns drag down banks, curb investor confidence
* Worries over yen strength weigh on some exporter shares
* JAL surges after government says it is ready to support it
* Banking sub-index hits lowest since mid-March
TOKYO, Oct 1 (Reuters) - Japan's Nikkei average hit its lowest point in two months on Thursday, with shares of exporters hurt by a stronger yen, while uncertainty about the policies of the country's new government dampened investor confidence.
Banking shares, including Mitsubishi UFJ Financial Group, lost ground on a string of events including financial services minister Shizuka Kamei's interest in introducing a moratorium on the repayment of the principal on mortgages and bank loans to help small and midsize businesses.
"What the market hates the most is uncertainty. We have no clear idea about the direction of the new government's policies. So far, there's no policy ideas that are positive for stocks, with a cut in public spending and the loan moratorium having a negative impact," said Masaru Hamasaki, senior strategist at Toyota Asset Management.
"The Nikkei could even break below 9,000 if the recovery scenario that investors expect for the second half were to fall apart, exacerbated by the stronger yen."
The benchmark Nikkei began the second half of Japan's fiscal year on a weak note, sliding 1.6 percent to 9,974.45, after briefly touching 9,965.06, its lowest since July 24.
The broader Topix fell 1.5 percent to 895.92.
Market players also said Tokyo shares were likely lifted the previous day on window-dressing buying at the end of Japan's fiscal half-year, and that their weakness may be partly due to such buying has dissipating.
Little impact was seen from the Bank of Japan's closely watched tankan survey, which showed that Japanese business confidence improved as expected in the three months to September.
U.S. stocks fell on Wednesday after a surprising contraction in an index of Midwest business activity, but buying of technology bellwethers like Cisco Systems Inc at the end of a strong quarter limited losses.
A focal point in the near term will be forthcoming U.S. economic indicators including jobs data on Friday, as well as fluctuations in the yen.
BANKS SLIDE, YEN WEIGHS
The yen stood around 89.90 yen to the dollar on Thursday, after hitting an eight-month high against the greenback of 88.23 yen on trading platform EBS on Monday.
Investors fret about a stronger yen as it eats into exporters' profits when they are repatriated, and many Japanese exporters have set their exchange rate assumptions for the dollar around 90-95 yen for the current fiscal year to March.
Chip-tester maker Advantest tumbled 5.8 percent to 2,345 yen and Canon Inc lost 3 percent to 3,520 yen. Kyocera Corp slid 2.5 percent to 8,120 yen.
"While the dollar rose above 90 yen the other day, it looks as if the trend for yen strength might still be in place," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.
The banking sector sub-index fell to as low as 138.37, its lowest since mid-March. In addition to policy risk, plans announced last week by Nomura Holdings to issue up to $5.6 billion in shares, have underscored worries that banks might also come out with big share offerings in the face of a global regulatory push for banks to carry bigger capital buffers.
Mitsubishi UFJ Financial Group, Japan's top bank, dropped 5 percent to 458 yen, Mizuho Financial Group slipped 2.3 percent to 174 yen and Sumitomo Mitsui Financial Group shed 3.2 percent to 3,030 yen.
Bucking the trend was Japan Airlines Corp, which climbed after Japan's prime minister and transport minister said on Wednesday the government was ready to support it, aiming to dispel worries over the viability of the loss-making carrier.
Japan Airlines climbed 4.6 percent to 138 yen. (Editing by Joseph Radford) (Reporting by Aiko Hayashi and Masayuki Kitano)