The market hit a 16-month high this week

At the close, the Nikkei share index had lost 554 points to 10,335.

But the mood among investors remained relatively calm.

Instead of reflecting any particularly acute crisis, the fall was mainly seen as a reaction against recent sharp gains in the Nikkei, which hit a 16-month high at the beginning of this week.

"It's part of a global reversal," Nikko Salomon Smith Barney analyst Alex Kinmont told BBC World Business Report.

Traders also worried that hi-tech shares could come under pressure if Sony were to report poor results after the markets closed.

Ups and downs

In general, investors in Japan are relatively buoyant at present.

There are increasing signs that the economy is starting to pull out of its decade-long recession.

"It's very difficult for Japan not to recover if the rest of the world recovers," said Mr Kinmont.

But this very optimism has drawn significant flows of foreign money into Japan's capital markets, which has sparked a two-year surge in the value of the yen.

This has made conditions difficult for Japanese exporters such as Sony, whose performance is crucial to Japan's hopes of recovery.

Japan has repeatedly intervened to push down the yen, but with little lasting effect, and its calls for global cooperation to realign exchange rates have gone unheeded.

'Appropriate levels'

Thursday's sharp fall, which followed a drop on Wall Street on Wednesday, was welcomed by some analysts.

"This is what the recently overheated Japanese and US stock markets needed," said Mitsugu Kanno of Shinko Securities.

"Pricewise, the Tokyo market appears to have come down to appropriate levels."