The 225-issue Nikkei Stock Average dropped 796.01 points, or 2.78 percent, from Tuesday to close the day at 27,818.62.
The broader Topix index, meanwhile, lost 39.11 points, or 1.97 percent, to finish at 1,947.46.
Brokers here said Wall Street set a negative lead overnight after the U.S. Consumer Price Index (CPI) data for August showed an unexpected increase in consumer prices by 0.1 percent.
The results were opposite to median market expectations, investment analysts here said.
"The U.S. Consumer Price Index report was a negative surprise for the stock market," Masahiro Yamaguchi of SMBC Trust Bank was quoted as saying.
He added that the Nikkei could slip back below 27,000 on future Federal Reserve interest rate hikes. Other analysts added that that latest inflation data not only cemented the Fed's next hefty rate hike, but also led to increased fears for the outlook of the U.S. economy.
"The stock market was expecting to see a slowdown in inflation in the United States but the strong reading made investors jittery about the outlook for the U.S. economy as a result of aggressive interest rate hikes," Shingo Ide, chief equity strategist at the NLI Research Institute, was quoted as saying.
Remarks from Japanese Finance Minister Shunichi Suzuki suggesting currency market intervention weighed on sentiment, dealers here said, compounded by reports the Bank of Japan conducted a pre-intervention rate check following the yen's sharp decline.
"The currency may not rise further as there is the view in the market that Japan cannot conduct intervention without gaining consent from the United States, which will never agree to sell the dollar," Takuya Kanda, senior researcher at the Gaitame.com Research Institute, was quoted as saying.
By the close of play, electric appliance, rubber product, and precision instrument issues comprised those that declined the most, with falling issues outpacing rising ones by 1,675 to 131 on the Prime Market, while 31 ended the day unchanged.
Heavily-weighted technology issues weighed on the broader market, with chipmaking equipment maker Tokyo Electron dropping 3.7 percent while technology startup investor SoftBank Group Corp. fell 4.4 percent.
Chipmaker Screen Holdings, for its part, ended the day down 2.0 percent.
Exporter-linked issues lost favor as the yen regained some ground against the U.S. dollar, with Toyota Motor reversing 1.4 percent, while Suzuki Motor lost 1.9 percent.
On the Prime Market on Wednesday, 1,200.48 million shares changed hands, rising from Tuesday's volume of 931.59 million shares.
The turnover on the third trading day of the week came to 3,062.09 billion yen (21.36 billion U.S. dollars).
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