Tokyo stocks have closed down 1.04 per cent, dragged down by profit-taking and a stronger yen following a G7 statement about volatility in global forex markets.
The benchmark Nikkei 225 index lost 117.71 points to 11,251.41 on Wednesday, while the Topix index of all first-section shares was down 1.19 per cent, or 11.48 points, at 957.02.
Selling pressure emerged from the outset as the yen climbed after the G7 said on Tuesday that "excessive volatility" in exchange markets threatened financial stability, as talk of a global currency war heats up before this week's G20 talks in Moscow.
Japan's policy of monetary easing has stoked fears, especially in Europe, of a so-called "currency war" between the major economies in which policymakers devalue their currencies to make exports more competitive.
"The yen's rebound was a key factor behind the Nikkei's decline, while players cashed in on the recent gains," said Katsuhiro Kondo, a broker with Tokai Tokyo Securities.
"Players are now looking to the G20 to check if the weak yen will be on the agenda."
Kondo added: "The bullish momentum remains alive as foreign and individual investors are still trying to catch up with the recent boom."
In afternoon Asian trade on Wednesday the dollar was at Y93.10 while the euro fetched Y125.20, from Y93.47 and Y125.75 in New York on Tuesday.
The Japanese currency was much weaker on Tuesday morning, with the dollar trading above Y94 and the euro above Y126.
Major exporters lost ground in Tokyo. Sony dropped 5.57 per cent to Y1,304 while Toyota lost 1.82 per cent to Y4,830.
Olympus fell 2.74 per cent to Y2,020 after the firm on Tuesday cut its full-year earnings forecast citing weak demand for digital cameras.