Tokyo's benchmark Nikkei index gave up more than three percent on Tuesday morning amid global worries over inflation and the Chinese economy, with high-tech shares hit particularly hard.
At the lunch break, the headline Nikkei index was down 2.77 percent or 786.58 points at 27,658.31, having dropped as much as 3.46 percent before paring losses.
The broader Topix dipped 1.75 percent or 34.63 points to 1,939.29.
The dollar slightly firmed to 111.07 yen from 110.93 yen in New York on Monday.
Global investors remained concerned about a tense political debate in Washington over raising the US debt ceiling as well as the financial crisis at Chinese property giant Evergrande, which drove down Wall Street shares.
"On the back of the falls of US shares and worries about the outlook of the Chinese economy, selling of futures led" the Nikkei down to 27,460.29 before it trimmed losses, Okasan Online Securities said in a commentary.
Surging energy prices were fuelling fears of inflation, analysts said.
"The global energy crisis" was "arguably today's main source of broader stock market weakness," Ray Attrill of National Australia Bank said in a note.
"Negative cues are appearing one after another," Chihiro Ota at SMBC Nikko Securities told AFP.
"US shares are turning weaker as the market expects rate increases… Investor sentiment was stronger, but it is now weakening," he said.
Chipmaker Murata Manufacturing dropped 3.32 percent to 8,748 yen. Tokyo Electron, which makes tools to build semiconductors, trimmed losses but still hovered down 3.35 percent at 45,570 yen.
Advantest, which makes chip-testing kits, was down 2.97 percent to 9,140, after falling to 8,910 yen in the morning.
But energy firm ENEOS Holdings rose 1.25 percent to 453.7 yen. Oil and gas developer INPEX Corp surged 4.26 percent to 931 yen.
Tokyo investors have high hopes that the new government of Prime Minister Fumio Kishida, who officially took office Monday, will issue fresh stimulus and call on businesses to increase wages as he prepares for a national election on October 31.
Kishida of the long-ruling Liberal Democratic Party has pledged to focus on the redistribution of wealth after the pro-business policies of his predecessors failed to end Japan's prolonged economic malaise.
Among other major shares, Toyota gave up 1.86 percent to 1,896 yen. Sony Group fell 2.09 percent to 11,720 yen.
SoftBank Holdings dropped 4.23 percent to 6,001 yen.
