The Nikkei share average fell 0.93 percent by midday on Wednesday as Honda Motor Co. and other exporters were hit by surging oil prices and a weak dollar that fanned concerns about company earnings.
Also weighing on the market were major steel makers, which were hit hard after they agreed to pay Brazilian mining and metals group Cia Vale do Rio Doce (CVRD) 71.5 percent more for iron ore in the year starting April 1.
That raised concerns about higher costs for steel consumers such as auto makers and ship builders, analysts said.
"The price hike was expected, but it sparked worries that steel makers might not be able to increase product prices further even if steel prices continue climbing toward the end of this year," said Kazuhiro Takahashi, general manager at the equity planning and administration department at Daiwa Securities SMBC.
"Buying by foreign investors also weakened a bit after the drop in U.S. stocks, while domestic institutional players continue to sell ahead of end-March book closing."
The Nikkei lost 108.41 points to 11,489.30 by the midsession break. The broader TOPIX shed 0.84 percent to 1,152.75.
The dollar remained weak against the yen on Wednesday, although it rebounded slightly after South Korea signaled that plans to diversify its foreign exchange reserves were not new and did not mean it would sell the U.S. currency.
The dollar posted its biggest daily fall in two months against major currencies the previous day as the market seized on reports that South Korea's central bank planned to diversify its reserves.
The U.S. currency traded at 104.40 yen in late morning, after earlier falling below 104 yen. It had been at around the mid-105-yen level on Tuesday morning.
U.S. crude oil prices surged nearly 6 percent to above $51 a barrel on Tuesday, the highest in 16 weeks, on supply concerns.
Honda, which earns more than three quarters of its sales overseas, dropped 1.6 percent to 5,490 yen and bigger rival Toyota Motor Corp. gave up 0.7 percent to 4,060 yen.
Japan's biggest steel maker, Nippon Steel Corp., tumbled 2.5 percent to 270 yen and second-ranked JFE Holdings Inc. sank 3.1 percent to 2,975 yen.
Elsewhere, Fujitsu Ltd. said it had sold another 86.3 billion yen ($828.6 million) of shares in Fanuc Ltd. and 34.4 billion yen of shares in chip-testing device maker Advantest Corp.
Fujitsu had already sold a block of stocks in the companies on Tuesday.
The combined sales would add around 73 billion yen to Fujitsu's consolidated net profit for the year to March 31, it said, but added it had no plan at the moment to raise its earnings forecasts.
Shares in industrial robot maker Fanuc tumbled 2.7 percent to 6,740 yen.
But some analysts said the drop in the share price was providing a good buying opportunity.
"I think Fanuc is king of the robot makers and its earnings momentum is good. With Fanuc shares falling to this level, I would say the shares are a good buy for mid- and long-term investments, as well as some other tech shares," said Kabu.com Securities' market analyst Tsutomu Yamada.
Advantest gained 0.3 percent to 8,920 yen. Fujitsu fell 0.7 percent to 667 yen, retreating from a six-month closing high hit on Tuesday.
Trading edged higher, with 826 million shares changing hands, the highest morning total since Feb. 14. Decliners outpaced gainers 1,124 to 348.