TOKYO The Nikkei average shed 1.6 percent on Thursday, giving up the previous session's sharp gain, as lacklustre Chinese manufacturing data reinforced concerns over flagging demand in Japan's largest trading partner.
Companies with heavy exposure to China took a beating after the HSBC Flash China manufacturing purchasing managers' index only ticked up to 47.8 in September from a nine-month low in August of 47.6, with few signs of a fast turnaround as the sector remained in contraction.
Miners .IMING.T, shippers .ISHIP.T and steelmakers .ISTEL.T, which are among the most affected by weak Chinese and global demand, were down between 2.4 and 3.4 percent.
Adding to the gloom, data showed Japanese exports to China dropped 9.9 percent in August compared with the same month a year earlier.
The Nikkei ended 145.23 points lower at 9,086.98, breaking support at its five-day moving average at 9,119.50, in solid volume, while the Nikkei China 50 .NCHN, made up of companies with significant exposure to China, lost 2 percent.
"We were all surprised by the reaction. The whole region is down but Japan is underperforming. But that's down to the currency," a senior dealer at a foreign bank said. "The currency reversed pretty hard overnight. People were disappointed as usual with the Bank of Japan."
The yen rose to 78.184 yen to the dollar after hitting a one-month low of 79.23 on Wednesday after the BOJ decision to expand its asset buying and loan programme by 10 trillion yen to 80 trillion yen to bolster Japan's export-driven economy.
"People are selling out of their call (options). People have been running quite a large position in upside calls for a couple of weeks now ... speculation around the U.S. QE, speculation around the Japan QE," the senior dealer said.
"We've seen a lot of people coming in taking that off over the last few days, so it's more about profit-taking than anything else."
Thursday's drop wiped off all of the gains on Wednesday, which saw the Nikkei hitting a four-month closing high.
The benchmark is up 7.5 percent this year, trailing a 16.2 percent rise in the U.S. S&P 500 .INX and a 12.4 percent gain in the pan-European STOXX Europe 600 index.
Still, Japanese equities have a similar valuation to European shares. Japanese stock has a 12-month forward price-to-earnings ratio of 11.1, versus STOXX Europe 600's 11 and S&P 500's 12.9, according to Thomson Reuters Datastream.
"I don't think there's going to be as big an effect on stocks this time as their 'Valentine easing'," said Yoshihiko Tabei, chief analyst at Kazaka Securities. "The outlook for the global economy is bleaker. They also didn't mention deflation."
The BOJ surprised the market in February by expanding its asset purchases programme, which helped the Nikkei rally 10 percent in the subsequent month and pushed the yen about 7 percent weaker against the dollar over the same period.
Construction machinery makers Komatsu Ltd (6301.T) and Hitachi Construction Machinery Co Ltd (6305.T), which have large exposure to the world's second-largest economy, shed 3.1 and 2.6 percent respectively, on Thursday.
Nissan Motor Co (7203.T), which one trader said earns about 25 percent of its net profit from China, ahead of Honda Motor Co's 16 percent and Toyota Motor Corp's (7203.T) 21 percent, dropped 3.4 percent, underperforming the other two major rivals. Honda fell 1.9 percent and Toyota slipped 1.4 percent.
Japanese automakers would also see an impact on September sales in China after recent anti-Japanese protests over a territorial dispute, the head of Japan's auto lobby said.
SEMICONDUCTORS VS TELECOMS
Weakness in semiconductor-related companies also weighed on the Tokyo market on concerns over the outlook for semiconductors following speculation that Samsung Electronics Co Ltd may cut its chip investment next year, although Samsung said it has not decided on its business plan for the next year.
Tokyo Electron Ltd (8035.T), Dainippon Screen Manufacturing Co Ltd (7735.T) and Advantest Corp (6857.T) were down between 4.6 and 6.6 percent.
The broader Topix .TOPX index dropped 1.4 percent to 753.81, with 1.9 billion shares changing hands, down from Wednesday's 2.07 billion but up from last week's average of 1.62 billion.
The telecommunications sector .ICOMS.T was the best performer, led by a 7.1 percent surge in Nippon Telegraph and Telephone Corp (9432.T) after it said it plans to buy back up to 150 billion yen worth of its own shares, or 3.4 percent of all shares issued, excluding treasury stocks.
Other gainers included Japan Airlines Co Ltd (9201.T), up 0.4 percent to extend Wednesday's 1 percent rise from its initial public offering price of 3,790 yen. It was the most-traded stock on the main board by turnover.
(Additional reporting by Sophie Knight; Editing by Kim Coghill)