The Nikkei average extended its losses in afternoon trade on Wednesday, sliding 0.9 per cent as investors sold everything from tech stocks to pharmaceuticals on concern China's stock market was headed for a downturn.
Sentiment was also bruised after data showing industrial output unexpectedly dropped in April, raising concern about slowing US demand for Japanese exports.
China's benchmark Shanghai Composite Index fell more than 7 per cent after the government lifted its tax on stock trading, its strongest effort yet to cool equity speculation.
"The decline today is 100 per cent influenced by China," said Soichiro Monji, chief strategist at the equity management department of Daiwa SB Investments.
"In theory it shouldn't matter if Chinese stocks plunge, but markets are at high levels and investors are very aware of the downside risk."
A sell-off in equities would hurt Chinese consumer demand, which has been a key component of that country's strong economic growth, Monji said.
The Nikkei was down 159.70 points at 17,512.86 as of 0509 GMT, while the broader TOPIX index fell 0.5 per cent to 1,729.85.
Shares of Kyocera Corp., a maker of electronic components, fell 2.2 per cent to 11,570 yen.
Government data showed on Wednesday that industrial output fell 0.1 per cent in April from March, compared with a consensus market forecast for a 0.5 per cent increase.
That added to concern that output growth may be losing momentum due to a slowdown in demand from the United States.
Drug maker Chugai Pharmaceutical Co Ltd dropped 7.5 per cent to 2,610 yen.
Shares of Fast Retailing Co Ltd rose 2.8 per cent to 9,260 yen after brokerage Goldman Sachs lifted its rating on the clothing retailer to "neutral" from "sell" and removed the stock from its Japan "sell" list.
The outlook for the company's earnings has improved, Goldman said in a note to clients on Wednesday, citing increased product recognition and market share expansion.