The Nikkei slipped 1.44% to close at 47,582.15 and the broader Topix fell 1.03% to 3,170.44.
The Nikkei volatility index, a gauge of investor anxiety, rose to a six-month high, reflecting investor demand for protection against drops in the stock market.
“This is a typical move when the sentiment is jolted by credit concerns,” said Shuutarou Yasuda, a market analyst at Tokai Tokyo Intelligence Laboratory.
“As the yen strengthened toward the end of the session, the Nikkei extended losses,” he said.
Overnight, U.S. regional bank Zions Bancorporation tumbled 13% after it disclosed an unexpected loss on two loans in its California division. In Japan, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group declined 3% each. The Topix banking index lost 2.99%, the second worst performing index after the insurance sector, which fell 3.17%.
Technology investor SoftBank Group, which drove the Nikkei’s latest rally, lost 3.36%.
The Nikkei saw a roller coaster move this week over political uncertainties. It slipped 2.6% on Monday following the departure of the Liberal Democratic Party‘s long-term partner Komeito from the coalition.
The index rose 3% in the previous two sessions after a small opposition emerged as a possible coalition partner for the LDP.
The index lost 1% for the week.
“Japan’s market showed signs of overheating in past sessions and some investors feared that it could peak any time,” said Takamasa Ikeda, senior portfolio manager at GCI Asset Management.
Ikeda, who was looking for cues to book profits, sold all of his long position in the Nikkei futures on Friday last week after seeing signs of weakness in U.S. shares.
“And the news about the Komeito’s departure broke,” he said.