The Nikkei fell 1.81 percent on Tuesday to its lowest close in more than four months as exporters such as Fanuc Ltd and Honda Motor Co Ltd sank on renewed concerns about higher US interest rates and a possible economic slowdown in a key export market.
Weak performances in India and other Asian markets weighed on Japanese stocks, analysts said. Sony Corp was lower despite its announcement of a plan to launch a digital single-lens reflex camera, while shares of real estate and brokerage firms lost ground as investors took profits.
"The focus is the United States, and investors cannot be confident about her economy," said Kazuhiro Takahashi, general manager of the equity planning and administration department at Daiwa Securities SMBC Co Ltd.
US Federal Reserve Chairman Ben Bernanke said the Fed needs to be vigilant, making sure inflation stays under control even as the US economy starts to shift to a slower pace of growth. US stocks plummeted on Monday as investors worried that Bernanke's tough talk could mean more interest rate hikes, driving the Dow Jones industrial average to its lowest close in three months.
"If the US continues to tighten its credit grip, there is a possibility that the US economy would have a hard landing," he added.
The Nikkei lost 283.45 points to 15,384.86. The TOPIX index declined 1.73 percent, or 27.62 points, to 1,567.30.
Kenichi Hirano, a strategist at Tachibana Securities, said recent falls have made many stocks attractive considering corporate profit outlooks, but investors won't come into the market until selling in global equity markets subsides.
"It's not moving on the Japanese economic fundamentals," he said.
Fanuc, a maker of industrial robots, gave up 2.8 percent to 9,830 yen and Honda Motor fell 1.3 percent to 7,340 yen.
Sony fell 1.5 percent to 5,110 yen even after the company in the early afternoon said it would launch a digital SLR reflex camera in Japan on July 21, marking its entry into the high-end of the camera market now dominated by Canon Inc and Nikon Corp.
Canon was down 0.9 percent at 7,850 yen and Nikon gave up 3.5 percent to 2,080 yen.
Shares of property and brokerage firms, which were one of the strong performers last year, gave in to profit-taking.
Japan's second-largest property developer Mitsubishi Estate Co Ltd fell 4.1 percent to 2,125 yen, its lowest close since December, and third-ranked Sumitomo Realty & Development Co Ltd lost 4.4 percent to 2,635 yen. In the brokerage sector, Nomura Holdings Inc declined 2.9 percent to 2,150 yen.
Selling from foreign investors also came into play.
Foreigners sold about 578 billion yen ($5.1 billion) of Japanese stocks on a net basis in May, according to the latest data available from the Tokyo Stock Exchange.
That marks the largest amount of net selling in a single month since the current bull market began in 2003, according to Hiroyuki Nakai, a chief strategist at Tokai Tokyo Securities.
After the market closed, wireless service operator Willcom Inc, owned by US fund Carlyle Group and Japan's Kyocera Corp, said it will likely go public around October 2007 in a share offering worth more than 200 billion yen. Meanwhile, Pioneer Corp also said after the market closed that it is aiming for an operating margin of 3 percent or more in the business year ending March 2009.
Pioneer ended down 2.2 percent at 1,891 yen.
Trade volume remained about the same as Monday with 1.54 billion shares changing hands. Decliners outnumbered advancers by a ratio of nearly 8 to 1.
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