TOKYO The Nikkei stock average fell 1.5 percent to a three-week closing low on Thursday, as worse-than-expected domestic machinery orders figures increased concerns that Japan's economy was slipping into recession and as strength in the yen weighed on exporters.
The yen has gained on worries that the U.S. 'fiscal cliff', a mix of mandated tax increases and spending cuts due to extract some $600 billion from the U.S. economy in the new year, could push the United States and possibly the global economy into recession.
The reemergence of macro-economic concerns, on a brief hiatus due to the U.S. Presidential election, comes amid a weak quarterly earnings season.
"The Japanese stock market does not have positive trading cues for the time being as companies are cutting their forecasts," said Hiromichi Tamura, chief equity strategist at Nomura Securities.
The Nikkei dropped to 8,837.15, its lowest close since October 17, breaking below its 25-day moving average at 8,867.44.
It is up 4.5 percent this year, trailing a 10.9 percent rise in the U.S. S&P 500 and a 10.8 percent gain in the pan-European STOXX Europe 600 index.
The broader Topix shed 1.4 percent to 735.35.
Japan's core machinery orders, seen as a leading indicator of capital spending in the coming six to nine months, fell 4.3 percent in September compared with a median forecast of a 1.8 percent decline.
"Japan's economy likely slipped into recession earlier this year and will gradually weaken for the time being," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The yen stayed firm after rallying on Wednesday as U.S. stocks .SPX skidded in their worst performance in over five months. It was trading at 79.77 to the dollar on Thursday, compared with an intraday low of 80.41 on Wednesday.
Exporters, which are hurt by a strong yen that eats into earnings garnered abroad, sank, with Canon Inc, Honda Motor Co and Toyota Motor Corp down between 2.5 and 3.5 percent.
But while the market mood was gloomy on Thursday, UBS recommended investors buy long-term Nikkei calls, saying it expected gradual improvement in the global economy.
"As a consequence of developed economy divergence, we anticipate a generally stronger U.S. dollar over the forecast horizon. Specifically, our year-end dollar forecasts versus yen; 85 at the end of next year and 90 by end 2014," it said.
As of Tuesday, 59 percent of the 119 Nikkei companies that have reported quarterly earnings so far undershot market expectations, according to Thomson Reuters StarMine. That compared with 54 percent in the previous quarter.
Among companies cutting annual guidance, telecommunication equipment maker Oki Electric Industry Co Ltd slid 9.4 percent and watch maker Citizen Holdings tumbled 7.9 percent.
But Isuzu Motors climbed 4.7 percent after it lifted its annual operating profit estimate and Mitsubishi Materials Corp (5711.T) added 3.2 percent after keeping its operating profit outlook despite falling copper prices.
Still, Japanese equities are slightly more expensive than their European counterparts, with a 12-month forward price-to-earning ratio of 11.3 versus STOXX Europe 600's 11, data from Thomson Reuters Datastream showed. The S&P 500 carries a 12-month forward P/E of 12.6.
(Editing by Edwina Gibbs)