The Nikkei fell 1.67 percent to end below 15,000 on Friday, its lowest close in three weeks, as investors took a Bank of Japan interest rate hike in their stride and sold stocks on worries over the impact of higher oil prices on corporate profits.
The market largely brushed off the BOJ's decision to lift the overnight call rate target to 0.25 percent from around zero as the move had been widely expected.
"The rate increase had already been discounted by the market, so this isn't likely to have an impact," said Naoki Kamiyama, Japan equity strategist at Morgan Stanley.
"Deflation is over, and as part of a return to normalisation, I think they are going to be normalising rates at a slow pace. As long as that is the case, I think the market should think of this as a positive," he added.
The Nikkei fell 252.71 points to 14,845.24, the lowest close since June 21 and the first time it ended below 15,000 since June 28. The broader TOPIX index was down 1.89 percent at 1,521.71, also the lowest close since June 21. Japanese markets will be closed on Monday for a national holiday. Trading will resume on Tuesday.
Analysts said the market came under pressure on concern about higher oil prices denting corporate earnings and also hurting consumer sentiment in the United States, a key market for Japanese products.
Hidenao Miyajima, president and chief strategist at Parnassus Investment Strategies, said foreign investors have stopped buying Japanese stocks as oil prices above $70 a barrel would force Japanese firms to slash their profit growth.
"Investors from the Middle East, for instance, expect Japanese companies to slash their profit growth by two percentage points to eight percent," he said. Textiles and rubber products makers saw sell-offs as their products use a large amount of petroleum.
Toray Industries Inc, the largest maker of synthetic fibres, fell 3.5 percent to 930 yen, and Mitsubishi Materials Corp declined 2.1 percent to 462 yen.
In the rubber sector, Bridgestone Corp gave up 2 percent to 1,984 yen.
Shares of Canon Inc and other Japanese exporters lost ground on concern that record high crude prices will crimp consumer spending, especially in the key US market.
Digital camera maker Canon lost 2.3 percent to 5,490 yen and Advantest Corp, a maker of chip testing devices, fell 3.2 percent to 11,060 yen.
Sony Corp came under pressure after its liquid crystal display business partner, Samsung Electronics Co Ltd, on Friday posted quarterly earnings that fell short of market expectations. The stock was down 2.8 percent at 4,790 yen. Samsung also weighed on its rival chip maker, Toshiba Corp, which sank 4.4 percent to 677 yen.
Investors also grabbed profits in drug shares which outperformed the TOPIX index this month as investors picked up defensive stocks.
Industry leader Takeda Pharmaceutical Co Ltd lost 2.1 percent to 7,080 yen, and No 2 ranker Daiichi Sankyo Co Ltd dropped 3.9 percent to 2,970 yen. Likewise, bank shares, which have drawn some buyers on hopes that their earnings will expand on rising interest rates, rang up losses on profit-taking. Industry leader Mitsubishi UFJ Financial Group Inc fell 2.5 percent to 1.58 million yen and Mizuho Financial Group Inc down 2.2 percent at 961,000 yen.
Trade was moderately active, with 1.66 billion shares changing hands on the Tokyo exchange's first section, compared with last week's daily average of 1.52 billion. Decliners outpaced gainers by a ratio of nine to one.