However, market losses capped on hopes of less aggressive interest rate hikes from the Federal Reserve in the coming months after data showing U.S. consumer prices inflation cooled in December.
The 225-issue Nikkei Stock Average index was down 330.30 points, or 1.25%, to finish at 26,119.52. The broader Topix index of all First Section issues on the Tokyo Stock Exchange declined 5.10 points, or 0.27%, to 1,903.08.
Market sentiments turned downbeat after reports that the Bank of Japan plans to review the side effects of its ultraloose monetary policy at its two-day policy meeting scheduled for next week.
The yen hit a seven-month high and Japanese bond yields broke above the central bank's target as markets challenged Tokyo's commitment to loose monetary policy.
The yield on 10-year Japanese government bonds breached its new cap of 0.5% on Friday trade at 0.53%. The BOJ was making unscheduled bond purchases in response. The BOJ will likely raise its inflation forecasts next week and debate whether further steps are needed.
Exporters dropped as a stronger yen cut the value of overseas revenue. Toyota lost 2.26%, while Nintendo fell 0.92%.
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Chip-related shares rose, tracking gains in U.S. peers. Chip-making equipment maker Tokyo Electron was up 3.04%.
Fast Retailing was down 7.95%, after announcing disappointing financial results on Thursday.
Convenience store operator Seven & I Holdings was up 6.1% after revising earnings forecasts higher.
CURRENCY NEWS: The yen was around lower 129 zone against the U.S. dollar in Asian trade on Friday. The yen stood at 129.12 against US dollar, appreciated 0.08% from previous day close of 129.22, after trading in the range between 128.68-129.43.
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