The Nikkei average fell 1.8 per cent today, a day after the US government's bailout of top mortgage firms sparked a broad market rally, with exporters sliding on a firmer yen and uncertainty over the global economy.
Shippers such as Kawasaki Kisen Kaisha dragged the market lower after a key freight index fell to its lowest point in more than a year, while bank shares dropped after posting double-digit percentage gains yesterday.
"Today is the day after the party," Fujio Ando, senior managing director at Chibagin Asset Management. "In hindsight, yesterday's rally was merely caused by the buying back of oversold shares."
Yesterday, the Nikkei average jumped 3.4 per cent, posting its biggest gain in five months, with financial shares soaring on the US government's bailout of mortgage finance companies Fannie Mae and Freddie Mac
"The US market's positive reaction to the rescue plan was not as big as Tokyo had expected, and this forced investors to refocus their attention on the uncertain economic outlook," said Yumi Nishimura, manager of investment advisory at Daiwa Securities SMBC.
Investors were also cautious ahead of earnings from US investment banks, such as Lehman Brothers. The benchmark Nikkei average lost 223.81 points to 12,400.65 and the broader Topix shed 2 percent to 1,191.59.
Shares of Honda shed 3.6 per cent to 3,520 yen, becoming the biggest drag on the Nikkei 225, while Canon Inc declined 2.1 per cent to 4,640 yen.
The dollar fell 0.6 per cent against the yen to 107.47 yen. Investors fret over a stronger yen as it curbs exporters' overseas profits when they are brought back home.