Japan's Nikkei average fell to a six-week low on Wednesday as a weakening dollar raised concerns about corporate earnings and spurred selling of Canon Inc and other exporters.
Bank issues continued to lose ground on growing worries about bad loans after financial sources said last week that Japan's Financial Services Agency would step up its investigation of the loans book at UFJ Bank, a unit of UFJ Holdings Inc
"Selling pressure ahead of the March book closing and disappointing earnings numbers from digital products makers are putting the market under pressure," said Hajime Yagi, general manager of Japanese equity investment at Meiji Dresdner Asset Management.
Yagi, who expects the Nikkei to fall as low as 10,000 in the near future, said the market's mood had turned bearish and any positive fundamental factors were unlikely to support prices.
The Nikkei average closed down 1.83 percent at 10,447.25, the lowest since December 26. It was the biggest one-day percentage fall since December 16.
The broader TOPIX index fell 1.98 percent to 1,022.61.
The dollar eased to around 105.30 yen slightly above its three-and-a-half year low of 105.22 yen hit in London on Tuesday, as hope for any kind of support to halt the dollar's decline from a Group of Seven (G7) finance ministers' meeting began to fade.
Digital camera and copier maker Canon, which generates the bulk of its sales outside Japan, slipped 0.58 percent to 5,180 yen.
Other large-cap shares were also sold, contributing to the fall in the Nikkei. Tokyo Electron Ltd fell 1.96 percent to 7,000 while its peer Advantest Corp tumbled 4.53 percent to 8,000 yen.
Bank shares logged losses as investors awaited bad loan data, expected this week, from UFJ Holdings, which has a large exposure to big, troubled corporate borrowers.
Other major banks have already released numbers for the October-December third quarter, showing steady declines in outstanding bad loans.
UFJ, the smallest of Japan's four mega banks, fell 6.88 percent to 406,000 in its fifth consecutive losing session.
Number two Sumitomo Mitsui Financial Group lost 4.91 percent to 523,000 yen while Mizuho Financial Group, Japan's largest banking group, dropped 4.33 percent to 287,000 yen.
Traders also cited large-lot selling by foreign investors keen to trim their equity exposure ahead of the G7 meeting this weekend in Florida.
Tetsuo Inoue, chief strategist at UAM Japan Inc, added that uncertainty about the future course of the US Nasdaq Composite Index was also forcing foreign investors to sell Japanese stocks.
Another worry, he added, was the outcome of the G7 meeting.
If the group failed to defend the weakening dollar, US and Japanese shares would face another wave of profit-taking, he said.
Digital products makers, which drove the market during the rally in January, were sold as growth prospects became uncertain after Sharp Corp on Monday left its full-year forecasts unchanged.
Sharp, the world's biggest maker of liquid crystal display (LCD) televisions and considered a frontrunner of the digital boom, fell 3.16 percent to 1,776 yen, extending Tuesday's 3.3 percent loss.
Sony Corp fell 0.95 percent to 4,160 yen and Sanyo Electric Co dropped 2.61 percent to 523 yen.
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