TOKYO, Sept 29 (Reuters) - Japanese stocks dropped over 2% on Wednesday after heightened inflation worries hit Wall Street shares overnight, while investors awaited the Japanese ruling party's leadership election that will decide the country's next prime minister.
The Nikkei average fell 2.48% to 29,563.18 by 0224 GMT, touching its lowest level since Sept. 6. The broader Topix shed 2.42% to 2,031.28.
The S&P 500 index dropped 2.04% in its biggest one-day percentage drop since May as deepening concerns about inflation have lifted U.S. borrowing costs.
Japan's ruling Liberal Democratic Party will start voting for a new leader at 1:00 p.m. Japan time (0400 GMT) and results from ballots of rank-and-file members and lawmakers are scheduled to be announced at 2:20 p.m.
Running for the top post are Taro Kono, Fumio Kishida, Sanae Takaichi and Seiko Noda. Market participants expect Kono or Kishida to win.
Kono's victory is seen positive for renewable energy firms and digitisation-related stocks and negative for electric power companies. Should Takaichi win, given her call for fresh reflationist policies, the yen could fall and stocks could gain.
"Investors want to confirm who is going to be the next prime minister before they start making bets," said Takatoshi Itoshima, a strategist at Pictet Asset Management.
"The focus is on how the market will react to the election results. With a large drop in the Topix this morning, the central bank may step in to support the market."
Technology shares led the decline, with Tokyo Electron falling 4.83%, Daikin Industries losing 4.27% and Advantest slipping 4.9%.
Travel-related shares outperformed on hopes of a surge in demand as the government plans to lift a coronavirus state of emergency in all regions on Thursday for the first time in nearly six months.
Airlines rose 1.03%, one of the only two sectors that advanced among the bourse's 33 industry sub-indexes. The other sector that climbed was shipping, which edged up 0.17%. (Reporting by Junko Fujita and Hideyuki Sano; Editing by Subhranshu Sahu)