Tokyo stocks declined sharply Thursday, with the key Nikkei stock index slumping 1.25 percent to a 5-month closing low on mounting concerns about a global economic downturn and compounded by a persistently strong yen which drove export-related issues lower.

Tokyo-based strategists noted that the yen's strength, particularly versus the U.S. dollar, sent investors away from stocks largely susceptible to currency moves, such as auto, tech and consumer electronic makers, and into defensive shares or safer currency or commodity havens.

Market players also said that a sluggish start to trade was intensified by fears that upcoming U.S. economic data, including the latest consumer prices, manufacturing data in Philadelphia and existing home sales, would confirm the world's largest economy is heading into recession.

Investors were seen to be hitting the sidelines ahead of the data due out later Thursday and remarks due next week from U.S. Federal Reserve Chairman Ben Bernanke are being keenly anticipated for signs of further monetary easing policies, brokers said.

"People are trying to identify what measures will be taken while sentiment is worsening globally, so the market will lack direction," said Mitsushige Akino, from Ichiyoshi Investment Management Co.

The 225-issue Nikkei Stock Average fell 113.50 points from Wednesday to 8,943.76, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange dropped 9.34 points, or 1.20 percent, to finish at 767.31.

Investors were also frustrated by a passive outcome to a hastily convened meeting between Vice Finance Minister for International Affairs Takehiko Nakao and officials from Japan's central bank, as hopes had been high that concrete steps would be taken to stem the yen's rise which hit near post-World War II levels during trading hours today.

"It's quite difficult for the government and the BOJ to take action now, but shares will continue to be dragged lower unless they can demonstrate their resolve to the market," said Investrust CEO Hiroyuki Fukunaga.

Japan's key export sector took a pummeling from the yen's rise and news released from the finance ministry before the start of play showing that the nation's exports declined 3.3 percent in July from a year earlier, with the value of exports falling for a fifth straight month, did little to buoy the market mood.

Automakers retreated with top-maker Toyota Motor skidding down 1.7 percent to 2,807 yen, while smaller rival Honda dropped 2.6 percent to 2,486 yen. Mazda meanwhile tumbled 5.6 percent to finish at 167 yen.

The world's largest camera maker Canon relinquished 1.5 percent to 3,550 yen and technology shares also underperformed the broader market, following weak earnings from overseas counterparts and target price cuts by a wholesale investment bank here.

DRAM circuit maker Elpida Memory fell 4.4 percent to 494 yen, following U.S. tech-giant Dell posting a downbeat revenue outlook and Toshiba plunged 4.5 percent to 322 yen following Citigroup Global Markets Japan revising downward their target price for the firm's stock.

Chip-tester maker Advantest closed down 4.3 percent at 1,069 yen, while optical instrument maker Nikon lost 3.7 percent to finish at 1,710 yen.

Fast Retailing, operator of the Uniqlo chain of casual apparel stores, was a notable gainer on Thursday, as investors sought issues less susceptible to global factors and powered instead by domestic demand. The firm's stock climbed 3.3 percent to 14,850, boosted in part by Goldman Sachs elevating its rating on the stock to "buy" from "neutral" and raising its target price, citing ongoing growth prospects in Asia.

Asahi Group Holdings was another bright spot on the penultimate trading day of the week. The drinks maker gained 1.7 percent to 1, 616 yen, following news it plans to buy Independent Liquor Ltd., a New Zealand-based maker and supplier of alcoholic drinks.

Trading volume on Thursday rose to 1.74 billion shares on the Tokyo Exchange's First Section, up from Wednesday's volume of 1.61 billion shares, with declining issues outnumbering advancing ones by 1,122 to 417.