TOKYO Japan's Nikkei average shed 2 percent to hit a two-month closing low on concerns that coming corporate earnings will be hurt by sluggish global growth, as the IMF cut its forecasts for the second time since April.
SmartEstimates from Thomson Reuters StarMine expects average negative earnings surprises of 1.2 percent for the July-September quarter's results.
With the weaker earnings outlook, the looming U.S. election and other issues, "people are still nervous," said a Tokyo-based analysts. "Very few people are willing to take risk."
The Nikkei .N225, which fell 1.1 percent on Tuesday, closed down 173.36 points at 8,596.23 on Wednesday. The index has fallen 7.5 percent since hitting a four-month high on September 19.
"We have seen a lot of shorts being put out today," a senior dealer at a foreign bank said.
Automakers came under pressure after they confirmed sharp declines in September sales in China after a territorial row between China and Japan sparked boycotts, raising concerns about their future in the world's biggest auto market.
Toyota Motor Corp (7203.T) also said it will recall 7.4 million vehicles globally due to malfunctioning power windows.
Toyota lost 1.9 percent and Honda Motor Co (7267.T) eased 1.1 percent, while auto-parts makers also suffered, with Denso Corp (6902.T), Toyoda Gosei (7282.T) and Exedy Corp (7278.T) down between 1.7 and 2.9 percent.
Companies with significant exposure to the PC market took a beating after Intel Corp (INTC.O), the world's largest semiconductor maker, dropped 2.7 percent following negative reports by at least two brokerages, citing weak demand for notebooks.
A weaker-than-expected third-quarter revenue estimate by U.S. chipmaker Intersil Corp (ISIL.O) also weighed on the sector.
Ibiden Co Ltd (4062.T), Advantest Corp (6857.T), Shinko Electric Industries Co Ltd (6967.T), Nidec Corp 6594.OS and TDK Corp (6762.T) shed between 1.6 and 4.6 percent.
Shun Maruyama, chief Japan equity strategist at BNP Paribas, said the Nikkei could test 8,500 as short selling by investors was likely to continue in the next one to two weeks.
"Current short-selling pressure comes from hedging against the forthcoming results season," Maruyama said.
He said the short-selling ratio on the Nikkei stood at 26 percent on a five-day moving average, below the 28 to 30 percent level when short-covering tends to emerge.
For many kinds of options and futures trading, a Nikkei level of 8,500 is the supporting line, Maruyama said. "Many investors have 8,500 put options. If the price breaks down below 8,500... maybe the market could go down to 8,200, 8,300."
Investors demand for Nikkei put options outnumbered demand for call options on Wednesday. Societe Generale analysts said most popular put options on the Nikkei with an October maturity had a strike price at 8,500 JNI085V2.OS, or 1.1 percent below Wednesday's closing level.
The next most-traded was a call option at 8,750 JNI087J2.OS, followed by another call at 9,000 JNI090J2.OS and a put at 8,250 JNI082V2.OS.
TOKYO ELECTRON SURPRISE
Tokyo Electron Ltd (8035.T) added 0.5 percent after its second quarter orders came in at 75 billion yen ($959 million), above market expectations of between 50 and 60 billion yen, traders said.
The broader Topix .TOPX index dropped 1.5 percent to 716.84, with 1.6 billion shares changing hands, slightly down from Tuesday's 1.62 billion but up from last week's average of 1.45 billion.
According to Thomson Reuters I/B/E/S, Japanese companies are forecast to post an average 57 percent year-on-year rise in earnings in 2012, down from an estimate four months ago of 73 percent.
Japanese firms posted an average 23 percent year-on-year decline in earnings last year, when the country was hit by a massive earthquake and tsunami and suffered the effects of nuclear fallout.
The benchmark Nikkei is up 1.7 percent in 2012, trailing a 14.6 percent rise in the S&P 500 .INX and a 10.5 percent gain in the pan-European STOXX Europe 600 index.
But Japanese shares are slightly more expensive than their European peers, with a 12-month forward price-to-earnings ratio of 11.1 versus STOXX Europe 600's 10.9, data from Thomson Reuters Datastream showed. The S&P 500's 12-month forward P/E stands at 12.9.
($1 = 78.1850 Japanese yen)