The Nikkei was down 0.3 percent to 19,325.87 by the midday break, after getting as low as 19,254.67 - the lowest level since May 1.

The fall also took the benchmark index below its 200-day moving average, an important technical support.

Investors flocked to the safe-haven yen, pressuring the dollar to fall 0.2 percent to 108.60 yen in Asian trade.

A top North Korean diplomat warned that his country was ready to send "more gift packages" to the United States as world powers struggled to find an effective response to Pyongyang's latest nuclear weapons test.

"Japanese stocks' valuations are cheap and companies' fundamentals are not bad, but foreign investors see Japanese shares losing attraction because they are susceptible to East Asian risks," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"There are expectations that the Bank Of Japan would buy exchange-traded funds when the market falls, but foreigners' selling is so big that it would offset the central bank's market-supporting operation."

The BOJ bought a total of 147.8 billion yen worth of ETFs over the past two days. Meanwhile, foreign investors have been net sellers of Japanese cash stocks for the past five weeks, offloading shares worth a total of 790.9 billion yen, Japan Exchange data showed.

Exporters were sold, with Toyota Motor Corp falling 0.8 percent and Nissan Motor Co dropping 1.1 percent, while Nintendo Co shed tumbled 1.5 percent and Advantest Corp declined 1.3 percent.

Elsewhere, Japan Post Holdings and Recruit Holdings jumped 6.2 percent and 7.8 percent, respectively, after Nikkei Inc said it will include the stocks in the Nikkei 225 as of Oct. 2.

On the other hand, the index provider said it will remove Hokuetsu Kishu Paper Co and Meidensha Corp from the index, sending their share prices down by 10 percent and 8.4 percent respectively.

CyberAgent dived 7.1 percent as investors had expected that the stock would be added to the index after some brokerages hinted in their reports that CyberAgent would be included.

Separately, the labor ministry said Japanese workers' wages fell in July from a year earlier due to a drop in summer bonus payments, casting doubts over the sustainability of a recent improvement in consumer spending.

The data had little impact on the market, traders said.

The broader Topix dropped 0.2 percent to 1,587.51. (Reporting by Ayai Tomisawa; Editing by Eric Meijer)