The benchmark Nikkei stock index finished the year down 9.4 percent on Friday, its first yearly fall in four years, as Russia's war in Ukraine and fears over a potential global recession as the result of aggressive monetary tightening by central banks offset the impact of solid corporate earnings with the yen's historic fall.
In the final trading day of the year, the 225-issue Nikkei Stock Average ended up 0.83 points, or 0.00 percent, from Thursday at 26,094.50. The broader Topix index finished 3.56 points, or 0.19 percent, lower at 1,891.71.
On the top-tier Prime Market, gainers were led by marine transportation, bank and retail issues. Mining, oil and coal product, and food shares were among the worst performers.
The yen firmed to the lower 132 level against the U.S. dollar in Tokyo amid a decline in long-term U.S. Treasury yields.
The Japanese currency had weakened to near the 152 level in October, losing about 38 yen in value since its strongest level in January, its biggest yearly drop in 40 years.
At 5 p.m., the dollar fetched 132.13-15 yen compared with 132.98-133.08 yen in New York and 133.78-80 yen in Tokyo at 5 p.m. Thursday.
The euro was quoted at $1.0651-0652 and 140.74-78 yen against $1.0656-0666 and 141.74-84 yen in New York and $1.0623-0625 and 142.12-16 yen in Tokyo late Thursday afternoon.
The yield on the benchmark 10-year Japanese government bond fell 0.035 percentage point from Thursday's close to 0.410 percent.
The Nikkei started 2022 at around 29,000 but fell early in the year as Russia's invasion of Ukraine in February raised fears over a surge in commodity prices. The index fell briefly below 25,000 in March.
Aggressive monetary tightening in the United States to tame soaring inflation caused the yen to fall sharply against the dollar, with the Japanese currency hitting a 32-year low in October, as investors rushed to sell the yen and buy the dollar on expectations of a wider interest rate differential.
The yen's historic fall pushed up profits of companies with high exposure to overseas markets such as automakers and technology companies. Net profit at Mazda Motor more than tripled in the six months ended September. Nintendo posted a record net profit for the period.
But seemingly endless interest rates hikes by the Fed and European central banks gradually led to fears over a global recession, triggering risk-averse sentiment and causing selling pressure on Tokyo stocks.
"Monetary policy in the United States had a big impact" on the fluctuation of Japanese share prices this year, said Masahiro Yamaguchi, head of investment research at SMBC Trust Bank.
"Higher U.S. interest rates also made stocks relatively less attractive, compared with other financial products, and that was also a negative for stocks", he said.
Analysts expect fears of a global recession will continue to weigh on Japanese stocks although the country's economy is expected to continue its recovery from the coronavirus pandemic. Many predict the Nikkei index to move in the range of 25,000 to 30,000 next year.
On Friday, the Tokyo market was buoyed by an overnight rally in the tech-heavy U.S. Nasdaq Composite Index, which jumped 2.6 percent after ending the previous day at a year's low.
But market participants were reluctant to take fresh positions ahead of the New Year holidays, and the firmer tone of the yen prompted some investors to lock in gains toward the end of the session.
"Some investors bought shares to adjust their holdings following a rise in U.S. stocks," said Makoto Sengoku, senior equity market analyst at the Tokai Tokyo Research Institute. "Otherwise, it was a very calm day due to thin trading."
The Nasdaq's rise boosted some technology-related shares, with electric appliance maker Omron climbing 110 yen, or 1.7 percent, to 6,405 yen, and electric component maker TDK advancing 40 yen, or 0.9 percent, to 4,335 yen.
Marine transportation issues were higher after a news report that Japanese nonlife insurers plan to continue to compensate for shipwrecks and other accidents in Russian waters despite Russia's war in Ukraine.
Nippon Yusen rose 24 yen, or 0.8 percent, to 3,110 yen, while Kawasaki Kisen gained 70 yen, or 2.6 percent, to 2,787 yen.
Among Prime Market issues, advancing issues outnumbered decliners 895 to 843, while 100 ended unchanged.
Trading volume on the Prime Market fell to 881.80 million shares from Thursday's 1,021.78 million.