The Nikkei average fell 1.90 percent on Monday to post its biggest one-day percentage loss in nearly three months, with blue chips such as Toyota Motor Corp down after weak US growth data and sluggish Japanese industrial output fuelled worries about a slowdown in Japan.
Hino Motors Ltd tumbled after it slashed its full-year profit outlook, while investors dumped recent heavyweight gainers such as Canon Inc to grab profits. Tokyo Electron Ltd lost ground after Goldman Sachs recommended investors to take profits, becoming the biggest drag on the Nikkei.
Japan's industrial output fell in September, as expected, with inventories rising in the information technology sector, underscoring concern that a US slowdown could hurt Japan's economic recovery.
"Adjustments of the inventories will come," said Tsuyoshi Segawa, an equity strategist at Shinko Securities. "It looks like the Japanese economy is entering a stalling phase for the third time since the latest economic expansion cycle started in early 2002."
Takashi Kamiya, chief strategist and asset allocator at T & D Asset Management, echoed Segawa's view and said: "Whether companies can clear the piled up inventories in the Christmas shopping season will be the key."
The Nikkei lost 317.22 points to end at 16,351.85, the lowest close since October 4. The benchmark also logged its biggest one-day percentage decline since August 7. The broader TOPIX index fell 1.82 percent to 1,620.65.
The dollar stayed in sight of a one-month low against the yen on Monday after soft US growth data reinforced expectations that the Federal Reserve will keep interest rates steady for a while. Yosuke Shimizu, head of the investment information centre at Monex Inc, said the high yen contributed to the market declines. Investors were also waiting to see the Bank of Japan's twice-yearly outlook report on the economy and prices due on Tuesday, he said.
"Various factors came out at the same time and the market reacted," he said. Still the correction may be short-lived, he said. "There is no change in the market view on economic fundamentals" limiting the falls in the market, he said. Shares of Toyota, the world's second-biggest auto maker, lost 1.6 percent to 6,980 yen.
Other blue chip shares gave up recent gains with Canon falling 3.4 percent to 6,270 yen after hitting its all-time high on a share split-adjusted basis earlier this month.
Ahead of their earnings announcements, shares of electronic components maker TDK Corp ended down 2.2 percent at 9,260 yen and those of Kyocera Corp fell 2 percent to 10,450 yen. After the market closed, TDK posted a better-than-expected 51 percent rise in quarterly net profit and kept its annual forecast for a 38 percent gain.
Kyocera, the world's top maker of ceramic casings for chips, said after trading hours its first-half profit more than doubled and raised its annual forecast above market expectations. Hino Motors plunged 6.5 percent to 580 yen to become the worst Nikkei 225 performer, following its cut in full-year profit forecast. Mitsubishi UFJ Securities downgraded the stock to "3" from "2", calling the downward revisions a negative surprise.
Chip production equipment maker Advantest Corp declined 2.0 percent to 5,820 yen, after trimming its full-year forecast on Friday to below market expectations. Tokyo Electron, the world's second-biggest chip production equipment maker, tumbled 5 percent to 8,620 yen as Goldman Sachs recommended taking profits in chip gear production shares for now, especially Tokyo Electron, citing sapping orders.
A few bright spots included industrial robot maker Fanuc Ltd, which rose 1 percent to 9,560 yen. It upped its full-year operating profit forecast to above a market consensus.
Trade volume rose to its highest level in almost three weeks, with 1.86 billion shares changing hands on the Tokyo exchange's first section. Declining shares beat advancers by a ratio of more than seven to one.