Japan's Nikkei drops over 3% as chip stocks slide

Markets are awaiting an earnings call from Taiwan Semiconductor Manufacturing (TSMC) 2330.TW later in the day. The world's largest manufacturer of advanced AI chips is expected to notch a fifth consecutive quarter of record earnings on Thursday, with a 59% surge in net profit for April-June, driven by booming global demand for AI infrastructure.

"Japanese shares are likely to be weighed down today by the previous day's decline in U.S. semiconductor stocks, while investors are expected to adopt a wait-and-see stance ahead of earnings from Taiwan's contract chipmaking giant TSMC," analysts at Tokai Tokyo Intelligence Laboratory said in a note.

Market breadth was negative, with 111 advancers on the Nikkei 225 against 112 decliners and two unchanged.

Memory chipmaker Kioxia 285A.T was the Nikkei gauge's biggest loser with a 13.5% fall. Chip testing equipment maker Advantest 6857.T shed 7.1% and SoftBank Group 9984.T, a tech investment conglomerate, slumped 7.2%.

Japan's Nikkei share average dropped more than 3% on Thursday, weighed down by chip-related stocks, as investors awaited results from Taiwan's TSMC after markets had largely priced in a solid outlook from Netherlands-based chip equipment maker ASML.

The Nikkei .N225 lost 3.1% at 66,597.62 in early Asia trading. The broader Topix .TOPX slid 1.2% to 4,039.07.

The Nikkei closed nearly 1.5% higher on Wednesday after chip equipment maker ASML's ASML.AS strong outlook raised its financial forecasts for this year, while the Philadelphia Semiconductor index .SOX hit a one-week low.