The Nikkei average hit a one-month closing low on Tuesday, declining 0.48 percent as a fall in commodity prices stoked worries about global demand and hit stocks sensitive to the economic cycle such as steel makers.
Also declining were trading firms strong in natural resource development overseas, such as Mitsubishi Corp. , and oil refiners and non-ferrous smelters, while Softbank Corp. rose on an encouraging view from Morgan Stanley.
Looking beyond the Tokyo market, commodity prices fell and emerging markets took a hit as a result, said Masatoshi Sato, senior strategist at Mizuho Investors Securities.
I think behind this chain of reaction lies concern about a slowdown in global demand.
The Nikkei was down 75.04 points at 15,719.34, its lowest close since Aug. 11, adding to a 1.78 percent fall the previous day.
The broader TOPIX index lost 0.66 percent to 1,585.98, also the lowest finish since Aug. 11.
Mitsubishi Corp., Japan's biggest trading firm, gave up 3.7 percent to 2,185 yen, hurt by a broad sell-off in gold, copper and other metals, and a slide in crude oil futures on Monday to a five-month low.
Shares of Nippon Steel Corp. , the world's third-biggest steel maker, fell 1.6 percent to 490 yen. Those of No. 4 JFE Holdings Inc. dropped 3.8 percent to 4,600 yen.
Trade edged higher, with 1.87 billion shares changing hands on the Tokyo exchange's first section, compared with a daily average of 1.68 billion shares in August.
Decliners overpaced gainers 1,318 to 310.
CONCERNS ON DEMAND
Oil futures rebounded to $66 per barrel on Tuesday. But concerns remained on the demand side given their six-day retreat, the first such streak in nearly three years, after Iran sounded a softer note on its nuclear programme and OPEC agreed to keep production steady for now.
Construction machinery maker Komatsu Ltd. extended losses from its 3.1 percent fall the previous day following surprisingly weak Japanese machinery orders data for July.
Komatsu, whose earnings are also sensitive to external demand, lost 4.1 percent to 2,090 yen.
Shares of Sumitomo Metal Mining Co. Ltd. , Japan's biggest gold producer, slid 4.7 percent to 1,595 yen despite an upward revision in its full-year earnings forecast.
Rival Mitsubishi Materials Corp. sank 4.9 percent to 481 yen.
In contrast, shares of land transporters, shippers and airlines rose as they stand to benefit from lower fuel prices.
Mitsui O.S.K. Lines. Ltd. , Japan's second-biggest ocean shipping firm, gained 0.7 percent to 881 yen. All Nippon Airways Co. Ltd. rose 1.3 percent to 479 yen.
But Toru Kitani, senior investment manager at Sompo Japan Asset Management, said a rebound in these sectors could be temporary.
As the market here further factors in a slowdown of the global economy, people start to talk about the risk of a fall in sales volumes at these basically cyclical companies, instead of improving margins due to a fall in fuel costs, Kitani said.
Among other gainers, Internet and telecoms conglomerate Softbank rose 0.5 percent to 2,155 yen.
Following bearish views from Lehman Brothers and Credit Suisse that weighed on the shares in recent weeks, Morgan Stanley said it gave an equal-weight rating to the stock, citing the company's high growth potential in the medium term.
Morgan Stanley set a target price of 2,330 yen.
Daiichi Sankyo Co. Ltd. ., Japan's second-biggest drug maker, rose 3.9 percent to 3,210 yen after it said on Monday it would sell two diagnostics units, one to Fuji Photo Film Co. and another to Sekisui Chemical Co. , for a total of about $428 million.