A report that Apple Inc. plans to ditch plans to boost output of its new iPhone also dented the market sentiment.
The 225-issue Nikkei Stock Average dropped 397.89 points, or 1.50 percent, from Tuesday to close at 26,173.98.
The broader Topix index, meanwhile, lost 17.86 points, or 0.95 percent, to finish at 1,855.15.
Fears of the U.S. Federal Reserve's continued aggressive rate hikes to combat soaring inflation leading to the world's largest economy being forced into a recession were compounded by U.S. housing data for August and the Conference Board's consumer confidence index for September beating median market expectations.
With central banks in Europe also in lockstep with the Fed in increasing their rates, market strategists said that globally investors are turning circumspect as borrowing cost continues to spike, raising fears the broader global economy could be recession-bound.
Conversely, the Bank of Japan has indicated its ultra-loose monetary policy will continue for at least the next few years, with the central bank's rate still parked below zero, ensuring an ever-widening interest rate gap between the BOJ and other major central banks, they added.
"It's very hard to buy stocks in a situation where everyone is working to gauge the risk of sliding into recession," Jun Kitazawa, a strategist at Miki Securities, was quoted as saying.
A risk-off mood grew in later trade, investment analysts said, following a report that U.S. tech giant Apple Inc. will halt plans to increase production of its new iPhone model as a surge in demand failed to transpire, leading to Apple-linked component makers being offloaded.
"The report resulted in selling of major Japanese electronic component suppliers for Apple," Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co., was quoted as saying.
By the close of play, marine transportation, real estate and insurance issues comprised those that declined the most, with falling issues outpacing rising ones by 1,011 to 760 on the Prime Market, while 66 ended the day unchanged.
Nikkei heavyweights weighed on the broader market, with technology startup investor SoftBank Group down 1.8 percent, Fast Retailing sliding 4.2 percent, while Fanuc and Tokyo Electron dropped 2.9 and 1.4 percent, respectively.
Among Apple's suppliers losing ground, Murata Manufacturing dropped 2 percent, while Alps Alpine fell 3.6 percent. TDK, for its part, ended the day 3 percent lower.
Drugmakers bucked the downward trend, however, with Shinogi advancing 1.1 percent after reporting positive results of its oral COVID-19 medication in reducing symptoms, and Eisai rocketing 17.3 percent after it reported positive findings following a trial of a new Alzheimer's treatment.
On the Prime Market on Wednesday, 1,554.74 million shares changed hands, rising from Tuesday's volume of 1,145.57 million shares.
The turnover came to 3,724.84 billion yen (25.75 billion U.S dollars).
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