TOKYO Japan's Nikkei share average fell to its lowest close in more than two months on Thursday on mounting fears that upcoming corporate earnings will be weak after the U.S. results season got off to a slow start.
The Nikkei .N225 dropped 0.6 percent to 8,546.78 points, losing ground for a third straight session. The benchmark has lost 8 percent since hitting a four-month high on September 19.
Ryota Sakagami, chief equity strategist at SMBC Nikko Securities said market participants remained worried that this earnings season would produce a slew of cuts to annual forecasts as well as some negative surprises.
"However, if you look at the current prices of individual companies, they should have priced in downward revisions. The market is overreacting," he said, while adding that the Nikkei could fall as low as 8,250 in a worst-case scenario.
SmartEstimates from Thomson Reuters StarMine show expectations for an average negative earnings surprise from Nikkei 225 companies of 1.3 percent for the second quarter results under Japan's fiscal year ending March 2013.
On Wednesday, the U.S. S&P 500 .INX fell for a fourth day after Chevron Corp (CVX.N) said third-quarter profits would be "substantially lower" than the previous quarter, while Alcoa Inc (AA.N) posted a quarterly loss and cut its outlook for global aluminum demand.
Japanese automakers and parts suppliers were under pressure after Toyota Motor Corp (7203.T) said it would recall more than 7.4 million vehicles worldwide for faulty power window switches.
The sector was already faced with concerns over the impact of sluggish global growth and anti-Japanese sentiment in China over a territorial dispute between the two countries.
Car parts maker Tokai Rika Co Ltd (6995.T) slumped 9.6 percent after the recall by Toyota, which lost 1.4 percent, slightly underperforming a 1.2 percent fall in rival Nissan Motor Co (7201.T).
"I would at this moment stay away from the manufacturers. Their second-quarter earnings are likely to be weak. The safe bet would be financials, real estate and these sort of domestic demand-related non-manufacturing area," said Hidehiro Tomioka, head of equity investment at Manulife Asset Management in Tokyo.
"Their earnings will alright whereas electronic companies, machinery companies and some of the basic material companies' earnings could be very bad, well below company projections for the second quarter."
The benchmark Nikkei is up 1.1 percent so far this year, trailing a 13.9 percent rise in the S&P 500 and a 9.9 percent gain in the pan-European STOXX Europe 600 index.
CANON, ADVANTEST UP ON SHORT-COVERING
Printer and semiconductor production-related companies rebounded after a recent battering on concerns over the outlook for the PC market.
"People have chosen to come in to do a bit of short-covering on some of the things that have been oversold," said a senior trader at a European bank.
Advantest Corp (6857.T) rose 4 percent after shedding 31 percent from September 19 to October 10, while Canon Inc (7751.T) gained 1.6 percent, snapping a five-session losing streak.
The broader Topix .TOPX index slipped 0.4 percent to 713.95 in relatively active trade, with 1.72 billion shares changing hands, up from Wednesday's 1.59 billion and last week's average of 1.45 billion.
Other gainers included KDDI Corp (9433.T), which advanced 1.6 percent after J.P. Morgan lifted its price target on the mobile operator.
Shin-Etsu Chemical Co Ltd (4063.T) added 1.4 percent after Nomura upgraded its rating on the company to 'buy' from 'neutral' and lifted its price target.
(Editing by Kim Coghill)