The Nikkei average fell for the fourth straight session on Wednesday, marking its longest losing streak in more than three months, as exporters such as Canon Inc were hit by concerns about overseas markets and further rises in the yen.
Shares of electricity firms J-Power and Chubu Electric Power Co declined after their shareholders rejected a British hedge fund's proposals to boost dividends, marking the latest setback for activist investors in Japan.
Shares of building leasing firm TOC Inc are likely to be a focus for the market on Thursday. Property investment firm DaVinci Advisors said after the close of trade it had raised its offer for TOC to 1,308 yen per share from 1,100 yen.
Worries about instability in the US subprime mortgage market and the possibility of a global sell-off were likely turning investors cautious, market participants said.
"People are talking about global liquidity taps being turned off," said Stefan Worrall, Japan equity broker at Credit Suisse. Participants were concerned that caution would lead to a closing out of the carry trade, where funds borrowed in the low-yielding yen are used to buy higher yielding assets.
"When risk appetite becomes quite strong, the yen weakens. When there's a little bit of retreat from risk, you get that indicated in the yen and a lot of people get a little bit concerned about whether the carry trade can continue," Credit Suisse's Worrall said.
The closing of carry trade positions would likely push the Japanese yen higher, weighing on profits of exporters such as Canon. The Nikkei slid 1.20 percent to 17,849.28, marking its longest losing streak since early March and its lowest finish in almost two weeks. The broader TOPIX index declined 1.40 percent to 1,741.08.
The yen rose to 122.80 against the dollar in late Tokyo trade, well above the 4-1/2-year low of 124.14 hit last week. Canon, which makes nearly 80 percent of its sales overseas and therefore benefits from a weaker yen, fell 2.3 percent to 7,210 yen.
Fanuc Ltd, the maker of industrial robots, slipped 2.2 percent to 12,680 yen. Fanuc makes roughly 65 percent of its sales outside of Japan. Shares of Electric Power Development Co Ltd, known as J-Power, dropped 5.3 percent to 4,680 yen. Shares of Chubu Electric declined 1.9 percent to 3,090 yen. Shareholders of both companies rejected proposals from hedge fund The Children's Investment Fund for higher dividend pay-outs.
TCI manages more than $10 billion of assets globally. It has been particularly vocal in Europe where it was instrumental in sinking Deutsche Boerse's bid for the London Stock Exchange and prompting a bidding war for Dutch bank ABN Amro.
But the setback for the fund did not mean that foreigners were likely to flee from Japan, said Jun Morita, a fund manager at Chibagin Asset Management. "Because of this I don't think foreign investors are suddenly going to become more negative," Morita said.
"More Japanese companies have been increasing their dividend pay-out ratios. And dividend yields are much higher than they used to be. If you look beyond these two cases and look at the big picture, I think you can see that things have changed."
Shares of Toshiba Corp rose 0.3 percent to 1,027 yen. The electronics conglomerate is on the brink of winning an order from NRG Energy Inc to build two US nuclear power reactors, government and company sources said on Wednesday.
As a result, the company would take a project that had been expected to go to General Electric Co and Hitachi Ltd Trade activity increased for the first time in four sessions, with 1.87 billion shares changing hands on the Tokyo exchange's first section. Declining shares beat advancers by a ratio of nearly four to one.