The Nikkei average fell on Monday, closing in on key support as newly installed European leaders grapple with sovereign debt woes and as a U.S. bipartisan committee looked set to miss a deficit reduction deadline.
Olympus Corp surged as much as 16 percent as speculators rushed to buy shares of the troubled company after long-term holders cut their stakes and as delisting fears fade, although the company's outlook remains far from clear.
In the United States, sources said the bipartisan deficit-reduction committee will announce that they failed to meet their deadline to find $1.2 trillion in budget cuts over the next decade.
Tomorrow could be scary, if the U.S. misses its deadline, Yutaka Miura, senior technical analyst at Mizuho Securities.
Depending on how U.S. stocks react, the Nikkei could break through support at the October 5 low of 8,343, he added.
The Nikkei .N225 fell 0.2 percent to 8,360.26 by mid-afternoon, while the broader Topix index .TOPX lost 0.3 percent to 717.64.
About 897 million changed hands on the main board, compared to Friday's full-day total of 1.45 billion shares. Volume was light even though the Tokyo Stock Exchange began new trading hours on Monday, with the morning session extended by a half-hour to 11:30 a.m. Tokyo time.
Despite the fact that they extended morning trading hours, volume remains extremely thin and most investors are staying put in this market, said Fumiyuki Nakanishi, strategist at SMBC Friend Securities.
New leaders in Greece, Italy and now Spain are rushing to enact austerity measures amid bond yields close or at 7 percent ahead of a meeting with euro zone leaders later this month to finalize the European Financial Stability Facility (EFSF).
The BOJ announced it bought exchange-traded funds worth 16.4 billion yen ($213 million) and 700 million yen of REITs on Friday, and expectations of further buying provided some support for shares.
But such buying could slow, as the central bank has incurred a latent loss of over 40 billion yen ($520 million) on its ETF holdings as of the end of September, Reuters calculations show.
The BOJ purchased 600 billion yen worth of ETFs as of end-September, nearly half of its target of 1.4 trillion yen.
Shares of embattled Olympus rose 13.9 percent, swinging sharply from their 16 percent drop at Friday's close.
The rise came even as investigators continued to probe whether funds used to cover up losses were funneled to criminal groups. Scrutiny is set to increase on deals not yet in the spotlight, including an ill-fated $780 million investment in technology firm ITX.
Automakers underperformed the broad market in heavy trading, as the dollar slipped below 77.00 yen, raising fears that a strong Japanese currency will take a further bite out of their profits if the dollar falls further on the deficit reduction impasse.
Toyota Motor Corp fell 2.6 percent to 2,384 yen after earlier dropping to 2,376 yen, its lowest level since May 1996. It was the heaviest traded issue by turnover on the main board.
Rivals Honda Motor Co shed 2.7 percent and Nissan Motor Co dropped 3.1 percent.
Elpida Memory Inc lost 7.3 percent, continuing its recent fall on investor concerns about weak demand and low prices for DRAM chips.
Japan's biggest maker of the chips has shed about 35 percent of its value since October 27, when it posted a quarterly operating loss on weak demand for PC chips. Since then, the flooding in Thailand has made the supply situation even worse and further weighed on demand. ($1 = 76.900 Japanese Yen)