Nikkei falls to 2-month closing low on earnings worries

* Nikkei drops 2 pct; Topix down 1.5 pct

* Toyota falls on vehicle recall, China sales slump

* PC-related firms suffer on concerns about weak outlook

* Tokyo Electron rises after Q2 orders beat expectations

By Dominic Lau

TOKYO, Oct 10 (Reuters) - Japan's Nikkei average shed 2percent to hit a two-month closing low on concerns that comingcorporate earnings will be hurt by sluggish global growth, asthe IMF cut its forecasts for the second time since April.

SmartEstimates from Thomson Reuters StarMine expects averagenegative earnings surprises of 1.2 percent for theJuly-September quarter's results.

With the weaker earnings outlook, the looming U.S. electionand other issues, "people are still nervous," said a Tokyo-basedanalysts. "Very few people are willing to take risk."

The Nikkei

, which fell 1.1 percent on Tuesday,closed down 173.36 points at 8,596.23 on Wednesday. The indexhas fallen 7.5 percent since hitting a four-month high on Sept.19.

"We have seen a lot of shorts being put out today," a seniordealer at a foreign bank said.

Automakers came under pressure after they confirmed sharpdeclines in September sales in China after a territorial rowbetween China and Japan sparked boycotts, raising concerns abouttheir future in the world's biggest auto market.

Toyota Motor Corp

also said it will recall 7.4million vehicles globally due to malfunctioning power windows.

Toyota lost 1.9 percent and Honda Motor Co


1.1 percent, while auto-parts makers also suffered, with DensoCorp

, Toyoda Goseiand Exedy Corp

down between 1.7 and 2.9 percent.

Companies with significant exposure to the PC market took abeating after Intel Corp

, the world's largestsemiconductor maker, dropped 2.7 percent following negativereports by at least two brokerages, citing weak demand fornotebooks.

A weaker-than-expected third-quarter revenue estimate byU.S. chipmaker Intersil Corpalso weighed on thesector.Ibiden Co Ltd, Advantest Corp, ShinkoElectric Industries Co Ltd, Nidec CorpandTDK Corp

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 investorswas likely to continue in the next one to two weeks.

"Current short-selling pressure comes from hedging againstthe forthcoming results season," Maruyama said.

He said the short-selling ratio on the Nikkei stood at 26percent on a five-day moving average, below the 28 to 30 percentlevel when short-covering tends to emerge.

For many kinds of options and futures trading, a Nikkeilevel of 8,500 is the supporting line, Maruyama said. "Manyinvestors have 8,500 put options. If the price breaks down below8,500... maybe the market could go down to 8,200, 8,300."

Investors demand for Nikkei put options outnumbered demandfor call options on Wednesday. Societe Generale analysts saidmost popular put options on the Nikkei with an October maturityhad a strike price at 8,500

, or 1.1 percent belowWednesday's closing level.

The next most-traded was a call option at 8,750

, followed by another call at 9,000

and a put at 8,250.TOKYO ELECTRON SURPRISETokyo Electron Ltd

added 0.5 percent after itssecond 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

index dropped 1.5 percent to716.84, w ith 1.6 billion shares changing hands, slightly downfrom Tuesday's 1.62 billion but up from last week's average of1.45 billion.

According to Thomson Reuters I/B/E/S, Japanese companies areforecast to post an average 57 percent year-on-year rise inearnings in 2012, down from an estimate four months ago of 73percent.

Japanese firms posted an average 23 percent year-on-yeardecline in earnings last year, when the country was hit by amassive earthquake and tsunami and suffered the effects ofnuclear fallout.

The benchmark Nikkei is up 1.7 percent in 2012, trailing a14.6 percent rise in the S&P 500

and a 10.5 percent gainin the pan-European STOXX Europe 600


But Japanese shares are slightly more expensive than theirEuropean peers, with a 12-month forward price-to-earnings ratioof 11.1 versus STOXX Europe 600's 10.9, data from ThomsonReuters Datastream showed. The S&P 500's 12-month forward P/Estands at 12.9.

($1 = 78.1850 Japanese yen)

((dominic.lau@thomsonreuters.com)(+81 3 6441 1917)(ReutersMessaging:)(dominic.lau.thomsonreuters.com@reuters.net))


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