Tokyo's Nikkei share average dropped 2.41 percent to post its biggest one-day loss in six months on Thursday as a sell-off on Wall Street spurred investors to unload NEC Corp and other recent gainers.
Energy-related issues booked steep losses after US crude futures hit their lowest in two months while bank shares also tumbled, including Mizuho Financial Group, which announced a share sale to beef up its balance sheet on Wednesday.
"The market has risen very quickly and this is a healthy correction," said Masaki Iso, chief investment officer at Yasuda Asset Management Co Ltd.
Iso added that despite the sharp fall, the market's upward trend remained intact. "I expect the market to steadily rise with investors picking up laggards."
The Nikkei fell 330.38 points to 13,359.51, posting its worst one-day drop since April 18 when the Nikkei benchmark fell 3.8 percent, or 432.25 points.
The broader TOPIX index lost 2.72 percent to 1,371.37.
Mizuho, Japan's second-ranked lender, tumbled 5.7 percent to 661,000 yen, extending a 4.2 percent loss from the previous session. The bank said on Wednesday that it would sell shares worth around $4.7 billion, using its soaring stock price to strengthen its balance sheet.
Mitsubishi UFJ Financial Group Inc, the world's biggest bank by assets, dropped 4.3 percent to 1.34 million yen.
Michael Coates, director of equity sales at KBC Financial Products, said Mizuho's share offering had raised some worries that other banks might take the same route.
"For the long term, the banks look actually pretty attractive still, but in the short term, there's not so much of a catalyst there to push them higher," he said.
"So people are holding off and locking in some profits, taking money off the table."
Some chip-related stocks, which posted hefty gains this week on data showing a pick-up in global chip sales in August, took a beating with NEC falling 3.8 percent to 637 yen and Hitachi Ltd dropping 4.9 percent to 720 yen.
Advantest Corp, the world's largest supplier of microchip-testing tools, lost 3.6 percent to 9,040 yen and its peer Tokyo Electron Ltd shed 4.9 percent to 6,000 yen. In the energy sector, Nippon Oil Corp, Japan's largest refiner, fell 4.3 percent to 935 yen, after crude fell to its lowest since August 8 due to sagging US demand.
A few bright spots included Fuji Heavy Industries Ltd, which jumped its daily limit of 18.5 percent to 640 yen after Toyota Motor Corp said on Wednesday it would buy an 8.7 percent stake in Fuji Heavy from US rival General Motors Corp.
Shares in Toyota were down 2.9 percent at 5,100 yen. Trade was slower than recent record levels above 3 billion shares. A total 2.82 billion shares changed hands, the lowest since September 16. Decliners surpassed gainers 1,508 to 123.
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