Japan's Nikkei stumbled to the lowest level in more than six months early on Thursday after Wall Street erased its 2018 gains while a tumble by Nasdaq dragged down Japanese chip-related stocks.

The Nikkei share average plummeted 3.5 per cent to 21,313.33 in midmorning trade, after falling to 21,282.14, its lowest level since early April.

The broader Topix hit a fresh one-year low, dropping 3.0 per cent to 1,601.73, causing market capitalization to fall below 600 trillion yen for the first time since September 2017. The Nikkei has dropped 13 per cent from a 27-year peak of 24,448.07 touched on October 2.

“We haven't thought that selling would be this steep. This sell-off makes us think the market may be set for capitulation,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center.

Wall Street's Wednesday rout jolted the Japanese market. Both the Dow Jones Industrial Average and the S&P 500 saw this year's gains disappear on dismal earnings forecasts, while the Nasdaq Composite plunged 4.43 per cent. The yen, seen as a safe-haven asset, strengthened 0.35 per cent to 111.87 on the dollar.

Chip equipment makers were sold sharply, with Tokyo Electron tumbling 5.0 per cent, Advantest nose-diving 8.7 per cent and Screen Holdings tanking 6.5 per cent. Other manufacturers also had big losses. Sony Corp declined 5.1 per cent, TDK Corp shed 5.5 per cent and Renesas Electronics Corp 6 per cent.

“Investors see that US manufacturers surrender to rising material costs, higher personnel costs and slower demand due to trade war, and they worry that these factors will also hit other global companies,” said Shogo Maekawa, global market strategist at JP Morgan Asset Management.

He added that earnings reports from Amazon and Alphabet Inc's due later in the day likely set the tone in the Japanese market on Friday. “These are the companies which had let the gains in the market this year so if their results disappoint investors, the market may see a further downside,” Maekawa said.

Sharp Corp nosedived 10 per cent after it cut its April-September sales estimate to 1.13 trillion yen from 1.30 trillion yen. Chat app operator Line Corp stumbled 9 per cent after it posted a 6 billion yen net loss for the January-September period. All of the Topix's 33 subsectors were in the red. Declining issues outnumbered advancers 2,066 to 32.

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