Tokyo stocks fell 0.89 percent Thursday, with exporters hurt by a stronger yen and as investors booked year-end profits.
The benchmark Nikkei 225 index at the Tokyo Stock Exchange, which lost three percent over the previous two days, fell 155.18 points to 17,257.40. The Topix index of all first-section issues gave up 0.70 percent, or 9.79 points, to 1,397.04.
The dollar was trading at 118.25 yen in Tokyo afternoon trade, rebounding from 117.63 yen earlier and up from 117.85 yen in New York late Wednesday.
However, it is well down from the seven-year high of 121.84 yen touched Monday.
Analysts said the move presaged further volatility in exchange rates, with speculators looking to take advantage of a growing spread between US Treasury and Japanese government bonds.
"It's clear that both the dollar and the Nikkei have been overbought," said Kazuyuki Terao of Allianz Global Investors.
"Investors are likely to keep taking profits for the time being, at least until upcoming events," including Sunday's lower house election in Japan, he said.
The US Federal Reserve's take on the economy next week "will be the next point of interest", he said, adding "if the US looks like it's clearly on the path to recovery, then both the dollar and the Nikkei may resume rising through the calendar year-end".
Eiji Kinouchi, chief technical strategist at Daiwa Securities, added: "Large overseas hedge funds and other hedged investors are making their year-end position adjustments, booking profits."
The Tokyo market might have entered a period of consolidation ahead of the New Year break, Nomura Securities said in a note to clients.
Falls were led by exporters, with Toyota falling 0.56 percent to 7,481 yen and Sony dropping 1.60 percent to 2,464 yen.
Skymark Airlines surged 12.55 percent to 305 yen after soaring 17.31 percent Wednesday on news that the struggling Japanese budget carrier is considering asking for help from domestic giant All Nippon Airways (ANA) as well as signing a tie-up with Japan Airlines.
An ANA spokesman told AFP talks over code-sharing as the main pillar of that assistance "will start next week or later".
-- Dow Jones Newswires contributed to the story --