TOKYO, July 1 (Reuters) – Japan’s Nikkei average dropped more than 2 percent below a key support to a seven-month trough on Thursday, with market players citing a rise in risk avoidance underscored by falls on Wall Street, a higher yen and slower China manufacturing growth.

Market players said the Nikkei’s next target is just above 9,000, a low tested in November and July 2009, after the index broke 9,200, near the 50 percent retracement from the Nikkei’s March 2009 low to its high in April.

Charts were mixed, with the Nikkei’s MACD continuing to slide after a bearish cross, though its slow stochastic was flattening in oversold territory.

A better-than-expected survey of domestic corporate sentiment, the Bank of Japan’s tankan, initially helped limit declines but this effect faded after data for China’s purchasing managers’ index, which fell to 52.1 in June from 53.9 in May.

“The market appears to have more room to fall even though some technical indicators are overstretched,” said Yutaka Miura, a senior technical analyst at Mizuho Securities.

“It’s hard to think the Japanese stock market will be able reverse course and start climbing on its own. There needs to be a halt to the advance in the yen and the falls in U.S. stocks. Worries about a slowdown in the economy and strengthening in the yen is working against exporters.”

The benchmark Nikkei .N225 shed 2.3 percent to 9,170.12, after falling 15.4 percent on the quarter to June 30, its worst quarterly performance since the fourth quarter of 2008, just after Lehman Brothers failed.

The broader Topix fell 1.8 percent to 826.21.

Japanese manufacturers turned optimistic about business conditions for the first time in two years, the Bank of Japan tankan survey showed, as solid exports to Asia supported the country’s economic recovery. [ID:nTOE660003]

On the technical front, the Nikkei remains under pressure after its 50-day moving average fell through its 200-day moving average, a formation known as a “death cross” that often signals further falls.

But its relative strength index (RSI) came in at just above 30, falling closer to oversold territory from that level on down.

There are a large number of options on Nikkei futures at 9,200 and then 8,500, with one market player describing the situation as “gamma short,” meaning that traders need to follow market moves in order to hedge their books and leading to selling in a falling market.

“This is a situation where selling invites selling,” said Hideki Horikawa, senior adviser at Himawari Securities.

EXPORTERS AT MULTI-MONTH LOWS

Shares of exporters slid, with Sony Corp (6758.T) and other high-tech stocks hitting multi-month lows, on worries about a stronger yen and after U.S. stocks booked the worst quarter since the market meltdown triggered by the collapse of Lehman Brothers.

Major Wall Street indexes all closed down more than 1 percent. [.N]

In Asia trade, the dollar JPY= hit a two-month low around 88 yen on EBS.

Many Japanese exporters have set their currency assumption rates for dollar/yen at around 90-95 yen for the year to March, and investors fret about a stronger yen as it eats into exporters’ profits when repatriated.

Sony dropped 3.9 percent to 2,290 yen, after falling as low as 2,288 yen, its lowest in seven months.

Separately, Sony said on Wednesday about 535,000 units of its “Vaio” brand personal computers globally may be in danger of overheating and that it has provided software on its website to eliminate the problem. [ID:nN30235272]

Kyocera Corp (6971.T) also fell more than 3 percent to hit a seven-month low, while Advantest Corp (6857.T) slipped more than 4 percent its lowest in nearly a year.

Honda Motor Co (7267.T) fell more than 3 percent to hit its lowest in about a year after Citigroup Global Markets Japan lowered its rating to “hold/medium Risk” from “buy/medium risk” and cut the target price to 2,720 yen from 4,170 yen.

Shares of Honda, Japan’s second-biggest automaker, were down 2.9 percent at 2,522 yen after falling as low as 2,506 yen.

But Bridgestone Corp (5108.T) rose 1.9 percent to 1,441 yen after Goldman Sachs hiked its rating on the tyre maker to “neutral”, citing higher-than-expected growth in tyre production.

Sumitomo Rubber (5110.T), whose rating was hiked to “neutral” as well, jumped 3.9 percent to 819 yen. (Editing by Edwina Gibbs)