By Dominic Lau
TOKYO (Reuters) - Japan's Nikkei average fell to a two-month low on Wednesday on concerns that upcoming corporate earnings for the latest quarter would 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.
By the midday break, the Nikkei shed 1.7 percent to 8,621.06 after falling 1.1 percent on Tuesday.
"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 and Honda Motor Co dropped 1.8 and 1.2 percent, respectively, while auto parts makers also suffered, with Denso Corp, Toyoda Gosei and Exedy Corp down between 3.1 and 3.4 percent.
Shun Maruyama, chief Japan equity strategist at BNP Paribas, said the Nikkei could test 8,500 as short selling by investors were 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.
"Eight thousand five hundred is the supporting line for many kinds of options and futures trading. 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."
Companies with significant exposure to the PC market came under pressure after Intel Corp, 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 also weighed on the sector.
Ibiden Co Ltd, Shinko Electric Industries Co Ltd, Nidec Corp and TDK Corp were down between 1.9 and 4.4 percent.
TOKYO ELECTRON SURPRISE
But Tokyo Electron Ltd advanced 1.5 percent after its second quarter orders came in at 75 billion yen, above market expectations of between 50 and 60 billion yen, traders said.
The broader Topix index dropped 1.4 percent to 717.64 in relatively active trade, hitting 52 percent of its full daily average for the past 90 days.
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 earlier estimate of 73 percent four months ago. Japanese firms posted a 23 percent year-on-year decline last year, when the country was hit by a massive earthquake and tsunami and suffered the effects of a nuclear meltdown and fallout.
The benchmark Nikkei is up 2 percent so far this year, trailing a 14.6 percent rise in the S&P 500 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 11.4 versus STOXX Europe 600's 11.1, data from Thomson Reuters Datastream showed. The S&P 500's 12-month forward P/E stands at 12.8.
(Editing by Jacqueline Wong)