A determined and animated Wade earned a hard-fought victory against his impressive opponent, who had taken the scalp of Krzysztof Ratajski in round one.
Asada, who has won three titles on the PDC Asian Tour this year, averaged over 97 and fired in a spectacular 130 checkout but was ultimately punished for missed opportunities at pivotal moments in the match.
“His performance shocked and surprised me,” admitted Wade, the winner of two televised titles in 2018.
“I honestly didn’t think he had that game in him and I should have prepared better.
“I didn’t play well and I had to dig in deep. I could have easily lost but I dug in and it’s a magnificent feeling to win a game that I probably shouldn’t have won.”
Smith – the third favourite with title sponsors William Hill to lift The Sid Waddell Trophy – moved safely through with a 3-1 victory over Ron Meulenkamp.
Finishes of 112 and 132 helped Premier League runner-up Smith book his place in the third round.
“I don’t take a lot of positives from that match but I got the job done and now I can go home, enjoy Christmas and prepare for my next game,” said Smith, who won the Shanghai Darts Masters in July.
“I’m getting married in the New Year and I want my fiancé to be the first woman in history to be waiting for me at the end of the aisle with the World Championship trophy!”
Eighth seed Simon Whitlock was dumped out by Ally Pally debutant Ryan Joyce in a surprise straight sets defeat for the 2010 finalist.
Joyce, who defeated Anastasia Dobromyslova in round one, edged the first set 3-2 before a 109 finish helped him take the second set 3-1 before he wrapped up an impressive victory.
“I think this is the biggest win of my career,” said Joyce, a semi-finalist on the ProTour in 2018.
“I realise I caught Simon on a bad day but I’m pleased that I played to my strength and hit the doubles.
“I was always expecting Simon to click in, play world class darts and come back but when that didn’t happen I sensed my opportunity and I’m glad I took it.”
Kim Huybrechts stormed through to the third round with a brilliant whitewash win over Daniel Larsson.
Huybrechts averaged over 103 as he romped to victory without dropping a leg against Sweden’s Larsson, who had beaten Robert Thornton in round one.
“I’m really happy with how I played,” said Huybrechts, who dedicated the victory to his late mother.
“It’s been really hard for me over the last couple of years to come to terms with losing the most important person in my life but my mum will always be my inspiration.
“I’ve put in some hard work both physically and mentally and I know I will be back better than ever.”
Brendan Dolan took out the first 170 finish of this year’s event during in his triumph over an out-of-sorts Joe Cullen as the former World Grand Prix finalist moved into the last 32.
The Northern Irishman, who has dropped just one leg in each of his first two matches, will meet either Mervyn King or Jan Dekker in round three.
“Joe didn’t perform and I was able to take advantage of that,” said Dolan.
“I kept him down and he didn’t get a leg on the board until the third set which must be soul destroying for a player.
“Things haven’t gone to plan for me during the year but I’m in the third round now and the past can be wiped off. There’s more to come from me and I’ll show it in the next round.”
Ireland’s William O’Connor also reached the last 32 after edging out James Wilson in a five-set thriller.
After hitting ten 180s and four ton-plus finishes between them, O’Connor came out on top by averaging 116 in the deciding set.
PDC Asian Tour star Noel Malicdem moved into the second round with a hard-fought victory against Jeffrey De Graaf.
Malicdem, who won two events on the Asian Tour and hit a nine-darter in the Event One final, landed crucial finishes of 96 and 91 as he came from 2-1 down to progress.
Nathan Aspinall enjoyed a comfortable victory against fellow World Championship debutant Geert Nentjes.
Aspinall, who won a Players Championship event in September, defeated the Dutch youngster by three sets to nil as the first round concluded.
The second round action continues with another double session on Thursday, featuring eight matches, including opening ties for two-time World Champion Adrian Lewis and former Champions League winner Mensur Suljovic.
The biggest ever World Darts Championship is being broadcast live on the dedicated Sky Sports Darts channel from December 13-January 1 and worldwide through the PDC’s international broadcast partners.
William Hill World Darts Championship
Wednesday 19 December
Nathan Aspinall 3-0 Geert Nentjes (R1)
Noel Malicdem 3-2 Jeffrey de Graaf (R1)
Brendan Dolan 3-0 Joe Cullen (R2)
Kim Huybrechts 3-0 Daniel Larsson (R2)
William O’Connor 3-2 James Wilson (R2)
Ryan Joyce 3-0 Simon Whitlock (R2)
Michael Smith 3-1 Ron Meulenkamp (R2)
James Wade 3-2 Seigo Asada (R2)
Thursday, December 20
Afternoon Session (1230)
Jermaine Wattimena v Michael Barnard (R2)
Alan Norris v Steve Lennon (R2)
Stephen Bunting v Luke Humphries (R2)
Steve Beaton v Chris Dobey (R2)
Evening Session (1900)
Cristo Reyes v Rowby-John Rodriguez (R2)
Mervyn King v Jan Dekker (R2)
Adrian Lewis v Ted Evetts (R2)
Mensur Suljovic v Ryan Searle (R2)