Japan's Nikkei average fell 1.8 percent to a five-week closing low on Tuesday, with exporters hurt as the yen rose broadly after China implemented a previously ordered increase in reserve requirements for some banks.
KDDI, Japan's No.2 telecom firm, tumbled 8.6 percent after it said it would pay $4 billion for a controlling stake in Jupiter Telecommunications Co, the country's biggest cable TV firm.
China's move was the latest measure by its authorities to curb lending and head off inflation, something that has rattled investors around the world on worries the global economy is not ready for less stimulus.
China's key stock index fell more than 2 percent, led by banks, accelerating its recent fall after the news.
"The China news made investors worry that hot money might shrink, and that is likely prompting them to lock in profits or close positions," said Mitsuo Shimizu, deputy general manager at Cosmo Securities.
"But the market is probably fretting about the stronger yen more than other factors, at least for now."
The benchmark Nikkei shed 187.41 points to 10,325.28, its lowest finish since Dec. 21 and well below its 25-day moving average of around 10,600.
The broader Topix lost 2 percent to 916.40.
The market showed little reaction to the Bank of Japan's decision to stick to its cautious view on the economy. The central bank predicted only a slightly slower annual pace of price falls for the year beginning in April due largely to rising crude oil costs.
STRONGER YEN HURTS
The yen jumped broadly after the news from China, which refocused attention on the country's efforts to rein in its surging economy.
The dollar fell below 90 yen, pulling away from its intraday high of 90.56 yen. Investors fret about a stronger yen as it hurts exporters' profits when they are repatriated.
Sony lost 4.8 percent to 3,000 yen and TDK Corp slid 3.5 percent to 5,800 yen.
Toyota Motor Corp fell 2.5 percent to 3,870 yen and Honda Motor skidded 2.7 percent to 3,090 yen.
Shares of KDDI sank to 482,500 yen to become the top drag on the Nikkei 225. The fall was its biggest in 15 months.
Jupiter Telecommunications, known as J:Com, fell 6.6 percent to 90,600 yen after jumping 14.4 percent the previous day.
Even prior to the China news, trade was already choppy, though range-bound, as investors grew cautious ahead of the earnings season and economic indicators such as U.S. growth data.
"It's a rebound market, with eyes on currency moves. But investors are reluctant to trade actively as they want to see the FOMC results and the U.S. GDP figures," said Fumiyuki Nakanishi, a manager at SMBC Friend Securities.
Key events in the United States this week include the Federal Reserve's Federal Open Market Committee (FOMC) decision on short-term interest rates and policy on Wednesday and U.S. fourth-quarter growth data due on Friday.
Japan's earnings season is set to heat up, with big-name companies including Canon Inc due to report later in the week.
About 2.4 billion shares traded on the Tokyo exchange's first section, compared with seven-month highs above 3 billion shares logged earlier this month.
Declining stocks outnumbered advancing ones by more than 7 to 1.
