The Nikkei average fell 1.37 percent on Thursday, reversing opening gains as property firms fell after Sumitomo Realty & Development Co Ltd was hit by a brokerage downgrade and by concerns about the impact of higher borrowing costs on the sector.
Shares in Sony Corp fell for the third straight session. It is delaying the release of its new PlayStation 3 videogame console by about half a year, until early November.
Shares in Seiko Epson Corp may be in focus on Friday after it said it expects a recurring profit of $341 million in the year starting in April, a 54 percent jump from its 2005/06 projection.
Sumitomo Realty fell 6.6 percent to 2,820, becoming the biggest percentage decliner on the Nikkei 225, after Mizuho Securities lowered its rating on the firm citing recent rises in the share price. Other property firms fell, in part on concerns that higher borrowing costs may eventually crimp earnings.
The Nikkei ended down 222.83 points at 16,096.21, its lowest finish in a week.
The broader TOPIX index was down 1.30 percent at 1,645.06.
Mitsui Fudosan Co Ltd, Japan's biggest real estate firm, fell 4.4 percent to 2,510 yen and second-ranked Mitsubishi Estate Co Ltd gave up 3.2 percent to 2,455 yen.
Electronics and entertainment conglomerate Sony fell 1.8 percent to 5,370 yen, helping to weigh on the tech-sensitive Nikkei. The company said the launch of the new game console would be delayed because development of some of the technology was behind schedule.
Bank of Japan Governor Toshihiko Fukui sought on Thursday to tame market expectations of an imminent rate hike, saying the central bank would keep rates near zero for a while despite ending its ultra-easy policy framework last week.
Following the close of trade cable broadcaster Usen Corp said it would form an operational tie-up with Internet firm Livedoor Co.
Shares in Usen closed down 4.7 percent at 2,715 yen on the Osaka exchange's Hercules market for start-ups, hit by profit-taking after speculation about such a move had boosted the share price in the previous session.
Shares in Softbank fell 1.3 percent to 3,020 yen after news that two US private equity firms plan a $15 billion offer for the Japanese unit of Vodafone Group Plc
Shares in banks were also hit, with Sumitomo Mitsui Financial Group Inc falling 3.2 percent to 1.22 million yen on a report that Goldman Sachs Group Inc plans to sell part of its preferred shares in the lender.
Shares in Canon Inc finished up 1.2 percent at 7,400 yen, following a report that it would likely beat its January-March group net profit forecast.
Toyota Tsusho Corp added 1.4 percent to 2,880 yen after the Nikkei average compiler Nihon Keizai Shimbun Inc said the trading firm will be added to the Nikkei 225 share average
Trading volume totalled 1.77 billion shares on the Tokyo exchange's first section, falling below last year's daily average of 2.07 billion for the fourth straight session. Decliners outnumbered gainers 1,326 to 286.
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