The Nikkei average fell 2.1 percent on Wednesday, with a wide range of shares hurt by growing worries about both the domestic and global economies, while exporters such as Canon Inc were also hit by a firmer yen. Banks including top lender Mitsubishi UFJ Financial Group lost ground after fresh credit worries hit their Wall Street peers.
While retailers fell after Japan's gross domestic product data marked an end to three quarters of expansion. "Frankly, I didn't think investors would react to the GDP data this much," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.
"But it probably made them reconfirm that the recession will continue throughout this year or even until the end of this business year. The data could be used as an excuse to run away from risk assets." The benchmark Nikkei shed 280.55 points to 13,023.05, after losing 1 percent the previous day.
The broader Topix declined 2 percent to 1,246.48. The dollar fell 0.6 percent to 108.54 yen, falling as low as 108.35 yen from the day's high of 109.38 yen. Investors fret over a stronger yen as it eats into exporters' profits when they are brought back home.
Tsuyoshi Segawa, equity strategist at Shinko Securities, also said much of the market's fall stemmed from worries about how US stocks will fare later in the day. "There's strong speculation in Tokyo that the US financial sector will be sold off tonight, as the short-sale rule is about to be lifted," he said.
Short trading in 19 major US financial stocks will revert to rules governing other shares on Wednesday as a Securities and Exchange Commission experiment against abusive short selling expires. Trade was thin on the Tokyo exchange's first section, with 1.9 billion shares changing hands, compared to last week's daily average of 2.2 billion.
Declining stocks outnumbered advancing ones by nearly 7 to 1. Credit woes show no signs of ending after a year, with J.P. Morgan Chase & Co, the No 3 US bank, saying on Tuesday it has chalked up $1.5 billion in losses so far this quarter on mortgage-related assets.
Canon declined 2.4 percent to 5,210 yen and Sony Corp dropped 3 percent to 4,210 yen. Mitsubishi UFJ lost 4.2 percent to 841 yen and No 2 Mizuho Financial Group gave up 3.5 percent to 468,000 yen.
Concerns about the Japanese economy weighed on shares reliant on domestic demand. Fast Retailing Co shed 3.3 percent to 11,160 yen to become the top drag on the Nikkei 225, while Softbank Corp, Japan's third-biggest mobile phone operator, lost 3.6 percent to 1,958 yen.
Japan's economy shrank 0.6 percent in April-June from the previous quarter, underscoring growing views that the world's second-largest economy is either slipping into a recession or is already in one. Corporate profit warnings have also fanned fears about Japan's economy and hit share prices.
Trend Micro Inc skidded 4.9 percent to 3,530 after the Internet security software firm said its operating profit is likely to fall 15 percent for the July-September quarter, hurt by a stronger yen and marketing expenses. Japan's biggest advertising firm, Dentsu Inc, sank 4.6 percent to 210,300 yen after reporting a sharp drop in quarterly profit and cutting its outlook - moves that led to a brokerage downgrade.