* Nikkei may test 20,000 - traders
* China volatility remains a concern - traders
* Steelmakers underperform after report saying agreeing to price cut with Toyota
By Ayai Tomisawa
TOKYO, Aug 20 (Reuters) - Japanese stocks fell for a third day to a three-week low on Thursday morning on worries about China's economy and Wall Street weakness, but SoftBank Group Corp soared on news its president will buy the company's shares.
SoftBank jumped 3 percent and was the most traded stock by turnover after President Nikesh Arora said he is buying about 60 billion yen ($483 million) worth of the company's shares over the next six months.
The Nikkei share average dropped 0.7 percent to 20,083.47 in midmorning trade, the lowest level since July 28.
U.S. stocks fell as minutes from the U.S. Federal Reserve's July meeting highlighted concerns over the state of the global economy and dented expectations for a rate hike in mid-September.
Fears about China's economy and falling oil prices also kept investors on edge.
"People think that the Chinese market will continue to remain volatile, and it will continue to affect sentiment in the Japanese market," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.
With the the dollar falling to a three-week low of 123.68 yen in overnight trade, from a high of 124.47, investors shied away from cyclical shares and looked to domestic-demand sensitive stocks, traders said.
"Rails and real estate are classic defensive stocks suitable for a market situation like we have now," said Gavin Parry, managing director of Parry International Trading.
He said that on top of low trading volume and turnover during the summer lull, concerns about a shaky global economy could pull down the Nikkei to the 20,000 mark.
Exporters were lower, with Toyota Motor Corp falling 1.6 percent and Nissan Motor Co dropping 1.2 percent.
East Japan Railway Co rose 1.5 percent and West Japan Railway Co jumped 3.1 percent. Realtors Mitsui Fudosan Co gained 0.9 percent and Sumitomo Realty & Development advanced 1.1 percent.
Steelmakers underperformed after the Nikkei business daily reported that Toyota Motor and its steel sheet suppliers agreed to a price cut of 6 percent for the April-September half.
Nippon Steel & Sumitomo Metal dropped 1.5 percent.
The broader Topix dropped 0.8 percent to 1,635.71 and the JPX-Nikkei Index 400 shed 0.8 percent to 14,710.10. (Additional reporting by Joshua Hunt; Editing by Shri Navaratnam)