The Nikkei average snapped a three-session winning streak on Wednesday on lingering worries over the global economy and as floods in Thailand shut factories run by Honda and many other Japanese manufacturers.
Although speculators bought back some recently battered shares including shipping firms, investors are not convinced European policymakers can dispel worries over the financial system through measures they have promised to deliver by the end of the month.
"There's still the question of how Europe will recapitalise banks. We still need to keep our seatbelts fastened," said Tetsuro Ii, chief executive officer at Commons Asset Management, noting that banks are usually reticent to accept money from the government.
The U.S. earnings season also got off to a less-than-encouraging start, with Alcoa, the largest U.S. aluminium producer, saying slowing economic growth knocked metals prices lower, denting its third-quarter profit.
CEO Klaus Kleinfeld warned of weak economic conditions through the year, particularly in Europe, "as confidence in the global recovery faded," fanning worries Europe's debt crisis would weigh on corporate earnings.
"Investors took it as bad news that the company clearly felt the impact of slowing growth," said Kenichi Hirano, operating officer at Tachibana Securities.
"Those who were looking for reassurance about the U.S. earnings season didn't find it," he said.
The Nikkei benchmark fell 0.4 percent to 8,738.90, though it trimmed losses a tad on a rebound in Chinese shares and stayed above the 25-day moving average around 8,637.
The broader Topix index fell 0.2 percent to 753.44.
They underperformed the rest of the region, where the MSCI ex-Japan Asian share index rose 0.7 percent.
BIG LOSERS
Among big losers in Tokyo were manufactures such as Honda Motor that have suffered damage in factories in Thailand as the Southeast Asian country's worst flooding in five decades disrupted supply and halted production.
Honda dropped 2.2 percent to 2,295 yen, and was the heaviest-traded issue by turnover while Toyota Motor Co, which has also shut some production facilities in Thailand, lost 0.3 percent to 2,582 yen.
With memories of the supply chain chaos after the March earthquake and tsunami still fresh in investors' minds, shares of other firms with plants affected by the flooding, such as Nikon Corp and Pioneer Corp, skidded.
Pioneer shed 4.3 percent to 314 yen and Nikon gave up 3.5 percent to 1,780 yen.
The natural disaster also hurt the country's non-life insurers, with the Tokyo Stock Exchange 's insurance subindex falling 1.5 percent.
On the other hand, shares of shippers jumped, with the TSE's sea transport index rising 5.7 percent, helped by short-covering after relentless selling in the past few months.
They were also helped by a rise to a 10-month high in the Baltic Exchange's main sea freight index tracking rates to ship dry commodities.
Shippers had been sold on worries about a sharp slowdown in the global economy but some players appeared to be unwinding their short positions in growth-sensitive stocks and long positions in defensive stocks.
Volume was relatively modest, with 1.52 billion shares changing hands on the TSE's main board, about 15 percent below the average in the past 20 days of around 1.82 billion shares. Decliners beat advancers by 8 to 7.
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