Japan's Nikkei average fell 1.8 per cent on Friday as worries about credit problems and their impact on the US economy hit Japanese financial stocks and exporters.
Property stocks lost ground on concern about a weakening in the domestic housing market after tighter construction rules were introduced earlier this year. Shares of brokerages dropped on a news report that a government tax committee has proposed letting temporary tax breaks on capital gains and dividend income expire.
The dollar fell against the yen, a sign that concern about a slowdown of the US economy is growing, and falls in Asian stocks also kept the Tokyo market in check.
Kirby Daley, a strategist at Fimat, said that on top of global uncertainties stemming from the US mortgage turmoil, Japan has its own reasons for failing to allure foreign investors, who have been the engine for the Tokyo market's rises.
"We have at play continuing inaction of the government to address long-term issues facing structural issues in the economy, pension reforms, tax forms, deregulation. We've seen a resurgence of bureaucracy," said Daley. "Foreign investors look at all of these and say, 'why buy?'"
The Nikkei average fell 283.23 points to 15,113.07 as of 0459 GMT. The broader TOPIX index lost 2.13 per cent to 1,466.97.
The Nikkei is currently trading at a PE of 16, compared with an average PE of about 20 in the last 5 years, said Yasuo Yabe, director of sales at Meiwa Securities. That compared with a PE of 15 for S&P 500 index he said.
"Valuations look low but that doesn't mean Japanese stocks are attractive," he said. "Valuations foreign investors think are appropriate for Japanese stocks are becoming lower."
Real estate stocks tumbled with Mitsubishi Estate Co Ltd down 5.9 per cent at 2,815 yen and Mitsui Fudosan falling 4 percent to 2,630 yen.
Brokerage firms also rang up losses. Nomura Holdings Inc tumbled 5.3 per cent to 1,819 yen and Daiwa Securities Group lost 3.9 per cent to 963 yen.
In the banking sector, Japan's second-largest banking group Mizuho Financial Group declined 3.7 percent to 526,000 yen and No 1 Mitsubishi UFJ Financial Group slipped 3.2 percent to 931 yen.