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Japan's Nikkei hits more than 2-month closing low

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* Nikkei falls for third session in a row

* Car parts maker Tokai Rika sags after Toyota recall

* KDDI climbs after J.P. Morgan lifts price target

* Shin-Etsu Chemical rises after Nomura upgrade

By Dominic Lau

TOKYO, Oct 11 (Reuters) - Japan's Nikkei share average fellto its lowest close in more than two months on Thursday onmounting fears that upcoming corporate earnings will be weakafter the U.S. results season got off to a slow start.

The Nikkei

dropped 0.6 percent to 8,546.78 points,losing ground for a third straight session. The benchmark haslost 8 percent since hitting a four-month high on Sept. 19.

Ryota Sakagami, chief equity strategist at SMBC NikkoSecurities said market participants remained worried that thisearnings season would produce a slew of cuts to annual forecastsas well as some negative surprises.

"However, if you look at the current prices of individualcompanies, they should have priced in downward revisions. Themarket is overreacting," he said, while adding that the Nikkeicould fall as low as 8,250 in a worst-case scenario.

SmartEstimates from Thomson Reuters StarMine showexpectations for an average negative earnings surprise fromNikkei 225 companies of 1.3 percent for the second quarterresults under Japan's fiscal year ending March 2013.

On Wednesday, the U.S. S&P 500

fell for a fourth dayafter Chevron Corpsaid third-quarter profits would be"substantially lower" than the previous quarter, while Alcoa Inc

posted a quarterly loss and cut its outlook for globalaluminum demand.

Japanese automakers and parts suppliers were under pressureafter Toyota Motor Corp

said it would recall more than7.4 million vehicles worldwide for faulty power window switches.

The sector was already faced with concerns over the impactof sluggish global growth and anti-Japanese sentiment in Chinaover a territorial dispute between the two countries.

Car parts maker Tokai Rika Co Ltd

slumped 9.6percent after the recall by Toyota, which lost 1.4 percent,slightly underperforming a 1.2 percent fall in rival NissanMotor Co

.

"I would at this moment stay away from the manufacturers.Their second-quarter earnings are likely to be weak. The safebet would be financials, real estate and these sort of domesticdemand-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 forthe 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 percentgain in the pan-European STOXX Europe 600

index.

CANON, ADVANTEST UP ON SHORT-COVERING

Printer and semiconductor production-related companiesrebounded after a recent battering on concerns over the outlookfor the PC market.

"People have chosen to come in to do a bit of short-coveringon some of the things that have been oversold," said a seniortrader at a European bank.

Advantest Corprose 4 percent after shedding 31percent from Sept. 19 to Oct. 10, while Canon Inc

gained 1.6 percent, snapping a five-session losing streak.

The broader Topix

index slipped 0.4 percent to713.95 in relatively active trade, with 1.72 billion shareschanging hands, up from Wednesday's 1.59 billion and last week'saverage of 1.45 billion.

Other gainers included KDDI Corp

, which advanced1.6 percent after J.P. Morgan lifted its price target on themobile operator.

Shin-Etsu Chemical Co Ltd

added 1.4 percent afterNomura upgraded its rating on the company to 'buy' from'neutral' and lifted its price target.

(Editing by Kim Coghill)

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

Keywords: MARKETS JAPAN STOCKS/

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