The Nikkei average fell 1.7 percent to end at its lowest in three weeks on Friday as exporters such as TDK Corp were hit by a stronger yen while bank shares dropped on worries over fallout from the global credit squeeze.
Shares in drug maker Kyowa Hakko Kogyo Co surged 16.6 percent to 1,402 yen as a source close to the matter said beer maker Kirin Holdings Co is in talks to take a majority stake in a deal that could top 300 billion yen ($2.6 billion).
But the main focus of trade on Friday, the 20th anniversary of the "Black Monday" Wall Street crash, was the dollar, which fell to a fresh three-week low against the yen after worse-than-expected earnings were announced by Bank of America,, the No 2 US bank.
"It's likely that corporations will become cautious about their outlooks for the second half of this fiscal year, and we may see fewer companies revising up their forecasts because of that," said Yutaka Miura, senior technical analyst at Shinko Securities.
The Nikkei lost 291.72 points or 1.7 percent to close at 16,814.37, the lowest close since September 28. The broader TOPIX index declined 1.6 percent to 1,591.28. Investors also shifted funds from stocks to bonds, helping send Japanese government bond futures to a one-month high.
"It looks like bonds are bought but stocks are sold as expectations for interest rate hikes have petered out," suggesting that the nation's economic recovery may be slowing, said Yumi Nishimura, manager of the investment advisory section at Daiwa Securities SMBC Co Ltd. Higher oil prices also put a lid on the market. Trade was slow, with 1.7 billion shares changing hands. Decliners outpaced advancers by a ratio of nearly six to one.
The strong yen dragged down technology exporters. Electronics parts maker TDK fell 2.4 percent to 9,660 yen, and digital camera maker Canon Inc dropped 2.8 percent to 5,930 yen. Shares of auto companies, which generate much of their sales outside Japan, also declined, with Honda Motor Co down 1.3 percent at 3,830 yen.
KDDI Corp, Japan's second-biggest phone company, dropped 1.6 percent to 890,000 ahead of its earnings announcement. After the market closed it posted an 8.8 percent rise in first-half operating profit but kept its full-year outlook below expectations.
In the technology sector, Elpida Memory Inc said after trading hours that its first-half operating profit likely fell 62 percent due to a tumble in the price of computer memory chips and warned that prices could remain low in the second half.
Bank shares, which had a brief respite on Thursday from several consecutive sessions of selling, once again headed south, and market participants pointed to a combination of disappointing earnings from Bank of America and general selling sentiment. Mizuho Financial, Japan's second-largest banking group slid by 2.2 percent to 616,000 yen, while No 1 Mitsubishi UFJ Financial Group was down 1.3 percent to 1,027 yen.
Consumer lender Acom Co Ltd bucked the overall bearish trend and jumped 17.9 percent to 2,640 yen after saying it likely beat its first-half operating profit forecast by 63 percent as fewer customers than expected switched to lending plans with lower rates. The news helped other lenders to advance.
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