Japan's Nikkei average slipped 1.11 percent on Wednesday to its lowest finish in nearly two weeks, hurt by a tumble in U.S. stocks and a stronger yen.
Investors sold a wide range of stocks including high-tech exporters such as Sony Corp. that had led the market's recent rally.
Shares of Aeon Co. Ltd. fell 3.1 percent to 2,195 yen after Japan's second-biggest retail group said on Tuesday that quarterly operating profit fell 16 percent due to poor sales at its U.S. apparel unit Talbots Inc. and some goodwill charges.
Millea Holdings Inc.and other insurers also declined on concerns that a fall in bond yields would hurt income from investments in government bonds. Insurers invest much of the money they collect from policy holders in bonds.
NEC Electronics Corp. was untraded due to a glut of buy orders at 3,670 yen, up 16 percent from Tuesday's close, following news that U.S. investment fund Perry Capital has joined a growing list of foreign shareholders pressuring weak Japanese firms by offering to buy a further 25 percent stake in the ailing chip maker from parent NEC Corp. for $1.25 billion.
Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, said global equities seem to be heading into a short-term correction.
From the perspective of liquidity, there is no market in the world that is not affected by the fallout of the subprime problem. Everyone is linked to this, he said.
Global markets were rattled on Tuesday after two leading rating agencies started to slash ratings for more than $17.3 billion of U.S. mortgage-related debt, raising concerns that the sector's woes are worse than previously thought.
I'm a bit worried about consumer spending in the U.S., but I don't think the U.S. economy will go bad because of this, Ogawa said. And the global economy outside the U.S. is doing well. So we shouldn't see a major negative impact on the global economy.
The benchmark Nikkei closed down 203.16 points at 18,049.51, the lowest close since June 28.
The broader TOPIX index lost 1.20 percent to 1,767.72.
The dollar stood at 121.40 yen after tumbling to a one-month low of 120.99 on EBS in earlier in the session.
Trade volume picked up, with 1.98 billion shares changing hands on the Tokyo exchange's first section, almost in line with last year's daily average of 1.93 billion shares. Declining shares beat advancers by a ratio of more than five to one.
Hiroaki Kuramochi, managing director at Bear Stearns, said the market appears susceptible to external factors such as U.S. stock moves and currencies as investors hold back ahead of an election for the upper house of Japan's parliament later this month.
After the closing bell, Tokyo Electron Ltd. said orders for its chip- and display-making equipment in April-June fell 35 percent from the previous quarter's record to about 140 billion yen ($1.15 billion), on slower demand from DRAM makers.
SONY, EXPORTERS DOWN
Shares of high-tech exporters tumbled, with Sony down 2 percent at 6,330 yen, while Canon Inc. declined 2.3 percent to 6,960 yen and Kyocera Corp. fell 1.2 percent to 12,880 yen.
Auto shares were also down. Toyota Motor Corp. lost 1.7 percent to 7,660 yen and Honda Motor Co. Ltd. retreated 1.3 percent to 4,470 yen.
A stronger yen weighs on exporters as it cuts the value of their overseas sales when translated back into the Japanese currency.
Shares of Millea were down 2.8 percent at 5,150 yen, Sompo Japan Insurance Inc. fell 2.8 percent to 1,480 yen and Nipponkoa Insurance Co. lost 2.9 percent to 1,115 yen.
The yield on the benchmark 10-year Japanese government bond plunged 8 basis points to a one-week low of 1.880 percent as of 0612 GMT, reflecting worries about the subprime mortgage market and the deteriorating housing market in the United States, which pushed investors to buy bonds.
Shares of NEC advanced 1.4 percent to 639 yen.
Elsewhere, there was only a single transaction in shares of Bull-Dog Sauce Co. Ltd., which was otherwise untraded and was quoted at 725 yen, down 12.1 percent.
U.S. hedge fund Steel Partners said it has appealed to Japan's Supreme Court over a court ruling in favor of Bull-Dog Sauce's anti-takeover defenses.
The defenses involve issuing stock acquisition rights on Wednesday aimed at diluting Steel Partners' shareholding from 10 percent to less than 3 percent.
Komatsu Ltd. climbed 1.8 percent to 3,900 yen after the Nikkei Financial Daily reported that Japan's top construction machinery maker is expected to boost its annual dividend payment by about 20 percent to 50 yen by the year ending in March 2010 as strong global demand lifts earnings.
Toshiba Corp. advanced 4.5 percent to 1,125 yen after CLSA raised its rating on the electronics conglomerate to buy from underperform, citing a stronger-than-expected NAND flash memory market and a deal to sell part of its stake in nuclear power unit Westinghouse to Kazakh state firm Kazatomprom.