By Hideyuki Sano and Sophie Knight
TOKYO (Reuters) - Japan's Nikkei share average eased to a two-week low on Wednesday, crucially holding just above its 25-day moving average, with profit warnings from U.S. firms viewed as a bad omen ahead of Japan's upcoming earning season.
Any break of the key chart level risks opening the way for a test of six-month low hit earlier, although expectations of more stimulus steps from the world's central banks could cushion the blow for investors worried about a global slowdown.
The Nikkei lost 0.1 percent to 8,851.00, marking its fifth straight session of declines, the longest such a spell since early April. The broader Topix index fell 0.2 percent to 757.29.
Still in one positive development, the Nikkei erased some of the earlier losses in the final minutes of trade to end at the session high. It has also managed to stay above the 25-day average at 8,785.
"If the Nikkei snaps (through) that level, it would clearly signify that the rally that began in early June is well and truly over," said Eiji Kinouchi, chief technical analyst at Daiwa Securities.
The benchmark index rallied some 10 percent between June 4 and July 4, led by domestic demand oriented shares, such as banks and properties.
But it has since lost almost 3 percent from those gains due to a stream of disappointing global data, including last week's U.S. non-farm payroll figures and Monday's sharp decline in Japanese machinery orders.
Profit warning from U.S. engine maker Cummins and chipmakers fueled worries companies may downgrade their guidance as the earning seasons kicked in in the United States and will start in Japan late this month.
"It is very hard to see things picking up in the short term," said Fujio Ando, managing director of Chibagin Asset Management.
"It would be great if the Bank of Japan could surprise us all by bumping up its exchange-traded fund budget, but that's looking increasingly unlikely."
The BOJ will begin a two-day policy meeting later on Wednesday. Although some market players are hopeful that the central bank may introduce further easing steps, an increasing number see it standing pat after it released an unexpectedly positive economic review last week.
"I don't think the BOJ will act this time. The Nikkei could fall to around 8,500-8,600 but investors are unlikely to sell aggressively because of expectations of more stimulus from the world's central banks," said Kyoya Okazawa, head of equity and derivatives at BNP Paribas.
Market conditions could improve after Friday, when there will be monthly settlement of a slew of options known as a "special quotation", or SQ, in Japan.
"The pattern over the last six months has been for the market to be weak in the run-up to an option SQ, but it usually firms up afterwards," Kinouchi said, referring to Friday's monthly settlement.
The broader Topix index fell 0.2 percent to 757.29, with volume at 1.36 billion shares, about 30 percent below the average so far this year. Decliners outnumbered advancers by 1,056 to 466.
SHARP LOOKING BLUNTER
Chipmakers suffered after weakening demand struck U.S. competitor Applied Materials and Advanced Micro Devices
Advantest Corp <6857.T> shed 3.2 percent, while Dainippon Screen MFG <7735.T> lost 1.1 percent.
Worries about a slowdown in hi-tech gadget demand also hit Japan's struggling electronics sector.
Sharp <6753.T> dropped 1.7 percent to a 33-year low of 356 yen, extending Tuesday's loss of 4.2 percent, after JPMorgan lowered its target price and forecast an operating loss of 60 billion yen for the first quarter due to poor demand for LCD screens.
Panasonic <6752.T> fell 4.6 percent while NEC Corp fell 4.5 percent.
Bucking the trend was Nikon Corp <7731.T>, which clawed back 0.6 percent after JPMorgan said in a note that Intel Corp's increased stake in competitor ASML , having caused the stock to drop 7 percent on Tuesday, actually only poses a limited downside risk because of the company's limited dependence on semiconductor business.
(Editing by Joseph Radford and Simon Cameron-Moore)