Tokyo's Nikkei average extended losses on Friday as growing concerns over a vote on bills to privatise Japan's postal system spurred selling in Fujitsu Ltd and other blue chip shares. Market sentiment turned bearish as some key members of the ruling Liberal Democratic Party were seen opposing the bills, whose fate will be decided in an upper house vote on Monday.
Prime Minister Janitor Koizumi has said rejection of the bills, opposed by many in the party, would be tantamount to a vote of no confidence, a tacit threat to call an election.
"The market will get a shock if the bills do not pass," said Tsuyoshi Sewage, an equity strategist at Shinko Securities. "There would be political turmoil and foreign investors would likely sell Japanese stocks," he said.
The Nikkei fell 1.13 percent or 133.99 points to 11,749.32, breaking below 11,800 for the first time since July 27. The broader TOPIX index fell 1.03 percent or 6.01 points to 1,191.77.
Technology shares lost ground after US techs slid from a four-year high hit this week, with Fujitsu dropping 2.2 percent to 615 yen.
Advantest Corp, the world's largest maker of chip testing devices, shed 1.2 percent to 8,970 yen and Matsushita Electric Industrial Co Ltd, the maker of Panasonic goods, fell 1.2 percent to 1,818 yen.
In the banking sector, Mitsubishi Tokyo Financial Group (MTFG) fell 1.3 percent to 942,000 yen and UFJ Holdings Inc declined 1 percent to 579,000 yen after financial sources told Reuters the two banks would delay the planned merger of their core commercial banks due to computer problems.
Profit numbers also determined losers and winners. Fuji Television Network Inc rose 0.9 percent to 220,000 yen after raising its full-year profit estimate by 7 percent on higher advertising and TV shopping revenue.
Meanwhile, Kawasaki Kisen Kaisha Ltd tumbled 4 percent to 667 yen after Japan's third-largest shipper posted a 9.9 percent decline in net profit on Thursday for the three months to June.
Despite growing concerns about a snap election and a possible political vacuum, some analysts said economic fundamentals remain strong and the impact of political developments on the market may be limited.
Tsuyoshi Nomaguchi, a strategist on Japanese equity research at Daiwa Securities Co, said the market may fall initially but losses should be capped.
"It's not like the government is debating over the national budget or Japan is in a situation where some kind of economic stimulus packages are needed," he said.