Japanese government bonds experienced a significant decline on Thursday as fiscal concerns resurfaced, while an overnight sell-off in Wall Street technology stocks dragged down the Nikkei index, led by heavyweight artificial intelligence-related shares.

The yen surged sharply against the US dollar, with traders on alert for potential intervention by authorities aiming to support the persistently weak currency.

The yield on the 10-year government bond rose by 7 basis points to 2.77%, reaching its highest level since mid-May. This followed a weak debt auction that highlighted growing worries about increased government spending.

The Japanese bond market has been under pressure since the government outlined extensive spending plans in its latest policy blueprint earlier this week, which also called for the Bank of Japan to align monetary policy with growth efforts.

"The market's reaction to the blueprint has sent shockwaves," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

Inadome noted that the removal of language concerning fiscal discipline has reignited market concerns over borrowing.

The Japanese government stated that total public and private investment will exceed 370 trillion yen (approximately $2.28 trillion) by the 2040 fiscal year, a move designed to support strategic industries in collaboration with the private sector.

Investors are concerned this could signal more borrowing, while the Bank of Japan may slow its pace of interest rate hikes amid intensifying inflationary pressures.

The benchmark Nikkei 225 index fell 2.5% to close at 68,733.15 points. In contrast, the broader Topix index edged up 0.09%, supported by investors buying cheaper stocks following recent declines.

Among chip-related shares, Advantest and Tokyo Electron dropped 9.95% and 7.44% respectively. Memory chip maker Kioxia plunged 13.47%.

"The market is undergoing a natural correction, with investors selling tech stocks to lock in profits while purchasing cheaper shares," said Kouji Toda, a senior fund manager at Resona Asset Management.

The Nikkei index had surged 37% last quarter, marking its largest quarterly gain since records began in 1965.

Of the more than 1,500 stocks traded on the Tokyo Stock Exchange's main board, 77% advanced, 20% declined, and 1% remained unchanged.

The yen jumped sharply in late trading after having fallen near 40-year lows.