Japanese stocks dropped to three-week lows on Thursday as ongoing tensions around North Korea continued to sap the risk appetite, while the retail sector underperformed on dismal earnings from convenience stores.

For the overall market, shares were on the defensive on continued tensions in the Korean peninsula after North Korea fired a missile into Japanese waters on Tuesday.

Investors are also focused on major events this week such as US jobs data and the Group of 20 nations' meeting in Germany, where US President Donald Trump and other leaders are expected to discuss steps to rein in North Korea's weapons programme.

The Nikkei fell 0.4 per cent to 19,994.06, the lowest closing level since June 16. The broader Topix shed 0.2 per cent to 1,615.53.

“Investors took profits on stocks such as financials, which gained recently on rising US yields,” said Nobuhiko Kuramochi, a strategist at Mizuho Securities. “They are risk averse now, and they want to secure profits before they see the outcome of G20 meeting.”

Kuramochi also said demand for overbought Japanese financial companies, which invest in high-yielding products such as foreign bonds, will be determined by whether benchmark US 10-year yields rise to 2.4 or 2.5 per cent in the coming weeks. They are currently trading above 2.3 per cent.

Elsewhere, Infoteria Corp, surged as much as 13 per cent to hit a record high of 1,714 yen on the small-cap Mothers market before ending down 2.4 per cent.

Market participants said day traders were seen engaging in short-term margin trade after Blockchain Collaborative Consortium, which is led by Infoteria, announced on Wednesday that it issued a new virtual currency called “Zen.”

Turnover of shares in Infoteria, which has a market capitalization of 25 billion yen, was a whopping 91.6 billion yen, accounting for about a half of the Mothers market's daily turnover of 196 billion yen.

The banking sector fell 0.5 per cent, with Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group both declining 0.7 per cent.

Convenience-store operator Lawson Inc shed 3.4 per cent after its operating profit dropped 6.9 per cent on the year to 16.25 billion yen for the first quarter ended May. Ministop Co stumbled 3.9 per cent after it posted an operating loss of 269 million yen for the first quarter ended May.

Meanwhile, retail investors sought investment opportunities in shares in construction companies in the Kyushu region on post-disaster damage repair demand after the region was hit by heavy rain overnight.

Evacuation centres were set up at schools and government buildings on high ground amid reports of landslides and flooded roads.

Engineering services provider Kyudenko Corp surged 4.1 per cent and civil-engineering firm Wakachiku Construction Co jumped 7.9 per cent.

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