North Korea on Sunday conducted its sixth and most powerful nuclear test, which it said was of an advanced hydrogen bomb for a long-range missile, prompting the threat of a "massive" military response from the United States if it or its allies were threatened.

All but one of the Tokyo Stock Exchange's 33 industry subindexes were down.

"Few investors are trading today. So in that sense, markets are not fully digesting all the factors. I would say we could see more downside moves," said a trader at a Japanese brokerage.

After North Korea's previous nuclear test on Sept 9, 2016, Japanese shares ended almost flat, only to suffer a sharp fall the following Monday after big losses on Wall Street. The S&P 500 fell 2.4 percent on that day.

But traders suspect the market will soon rebound once the initial fears stemming from the nuclear test fades.

"Markets do not expect the nuclear test to lead to an immediate military confrontation. People have learned that markets will take North Korea's actions in their stride," said Takashi Hiroki, chief strategist at Monex Securities.

"Some investors will see the fall as a good bargain-hunting opportunity," he added.

While many institutional investors stayed on the sidelines, Japanese retail investors sold small-cap shares, which have been popular in recent months.

Among them mobile game developer Klab fell as much as 10 percent to a 2-1/2-month low.

Topix small fell 1.7 percent while Topix 100 dropped 0.8 percent.

The index of Mothers start-up firm shares dropped 2.9 percent, edging near its three-month low touched in mid-August.

Bucking the trend, Sompo Holdings rose 2.7 percent after the company announced late on Friday that the property and casualty insurer agreed to sell British unit Sompo Canopius to streamline its overseas businesses.

Ishikawa Seisakusho, which makes naval mines, soared 13 percent on the rising North Korea tensions.

Toyota Motor shares were flat, outperforming the overall market, after the company reported strong U.S. sales in August.

(Editing by Shri Navaratnam)