The Nikkei average lost 1.4 percent on Tuesday in its biggest fall in a month, slipping below support at 10,000 as financial stocks tumbled on concern that the eurozone's debt woes may spread to Italy and over a stalemate in US budget talks.
Energy stocks tumbled, tracking falls in Brent crude, with Japan's largest oil and gas developer Inpex Corp falling 4.6 percent to 584,000 yen, its biggest daily slide since a sell-off on May 6, while Japan's biggest commodity trader Mitsubishi Corp fell 1.9 percent to 2,032 yen.
Blue chip exporters such as Toyota Motor and Canon Inc also fell sharply, hit by a stronger yen. The euro tumbled almost 1 percent to 111.77 yen, a fresh four-month low, while the dollar dipped below 80 yen. EU officials promised to provide cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors, but worries over Italy's banks sent the cost of insuring the country's debt to record highs, while the Italian stock market benchmark hit a one-year low.
"Financial stocks had been gradually rising ahead of earnings reports by their Wall Street peers, and that's why problems in the EU are hurting them a bit more than they would have normally," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Tokyo.
Japanese banking shares, which are near or at record low valuations, have climbed 5.1 percent since the beginning of June while the Nikkei has risen 2.4 percent. Separately, Aozora Bank tumbled to a three-week low in heavy volume after the placement of large cross-trade orders totalling about 30 million shares, traders said, spurring speculation of a sale by a major shareholder.
The benchmark Nikkei shed 143.61 points to close at 9,925.92, while the broader Topix index fell 1.5 percent to 857.19. "Whether the Nikkei can hold above its 200-day moving average of 9,895 is the key for the next few days," said Kenichi Hirano, a strategist at Tachibana Securities. "If it falls below this level, the market may see a correction and stay below the 10,000 mark for the next week.
Although investors believe there will eventually be a deal on the US debt ceiling, the lack of resolution at a time of increasing international concerns weighed on equity markets, with the Wall Street CBOE Volatility Index, a barometer of investor anxiety, spiking 15.3 percent. J.P. Morgan Chase will be the first of the big US banks to report earnings, with results due on Thursday. Results from top tech player Google also are expected Thursday.
Mitsubishi UFJ Financial Group, Japan's largest bank by assets, fell to a two-week low, shedding 2.9 percent to 397 yen. Sumitomo Mitsui Financial Group lost 2.1 percent to 2,466 yen. They were among the top three most actively traded stocks by turnover on the main board. Traders said a major shareholder in Aozora Bank could have sold the stock at as low as 184 yen. The shares tumbled 6.8 percent to close at 178 yen.
Nearly 17 million Aozora shares changed hands on the exchange by the close, well above its full-day average volume of 3 million shares for this year up to Monday. Denso lost 2.6 percent to 2,900 yen after the auto parts maker forecast a 28 percent fall in operating profit to 135 billion yen ($1.7 billion) for the year ending next March, hit by a strong yen and rising material costs. The figure is well below the median forecast of 168 billion yen in a survey of 15 analysts by Thomson Reuters I/B/E/S.
But truckmaker Isuzu Motors rose 0.5 percent to 387 yen after Mitsubishi UFJ Morgan Stanley Securities raised its rating to "outperform" from "neutral". The brokerage said Isuzu is expected to see increases in profits through the financial year ending in March 2013 due to strong truck sales in emerging markets such as Thailand.