The Nikkei average fell 1.55 percent on Friday as stronger-than-expected consumer price data raised concerns about a rise in borrowing costs, sending down Mitsubishi Estate Co Ltd and other property shares.
"The possibility that overnight rates may rise from zero is coming into sight and that has put a lid on the market," said Hiroichi Nishi, general manager of equity marketing at Nikko Cordial Securities Inc.
The selling spread to many sectors, with Toyota Motor Corp falling on the view that the yen may reverse a recent downtrend, which could curb growth in exporters' earnings.
Nishi said the strong consumer price index (CPI) data released before the start of trade increased the likelihood of the Bank of Japan ending its ultra-easy monetary policy, which would eventually lead to higher short-term interest rates.
"Investors are also debating which stocks to buy or sell under a credit tightening, with some saying banks may be good but companies with lots of debt may be bad, and so on," he added.
Katsuhiko Mori, senior portfolio manager at Daiwa SB Investments, agreed. "It may be that investors are getting nervous as the market is at a big turning point," he said.
The benchmark Nikkei ended down 246.42 points at 15,663.34, its lowest closing since February 20. On the week, the Nikkei fell 2.7 percent. The broader TOPIX index was down 1.18 percent on Friday at 1,612.96.
Japan's nation-wide core CPI rose a greater-than-expected 0.5 percent in January. The data had been eagerly awaited to help gauge the chances of a central bank policy shift. The BOJ policy board meets on March 8-9.
A Reuters survey showed that of 31 market participants polled, 15 said expect the central bank to vote in favour of ending its five-year-old quantitative easing policy of flooding the banking system with excess funds at its board meeting next week.
Property stocks were hard hit, as these firms have heavy lending requirements for developing properties. Mitsubishi Estate, Japan's second-largest property developer, tumbled 5.4 percent to 2,355 yen and No 1 developer Mitsui Fudosan Co Ltd fell 2.7 percent to 2,390 yen.
Technology stocks also remained subdued due to worries about the direction of the currency markets.
The dollar fell to a low of 115.56 yen soon after the CPI data, but then pulled back up, gaining about 0.5 percent on the day to around 116.40 yen on the view that the yen will remain a low-yielding currency for some time to come.
Electronics parts maker Kyocera Corp fell 2 percent to 9,910 yen, and consumer electronics maker Sony Corp declined 1.7 percent to 5,280 yen.
But bargain-hunting propped up steel stocks as some thought the sector was oversold on Thursday.
Nippon Steel Corp rose 0.9 percent to 457 yen. The world's third-largest steel maker lost 4 percent on Thursday even though it raised its already record profit estimate for the soon-ending business year by 1.9 percent.
Trade volume fell to its second-lowest level this year, with just 1.73 billion shares changing hands on the Tokyo exchange's first section. Decliners outnumbered advancers by 1,269 to 345.
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