Japanese shares shed the gains of the earlier session to close lower on Thursday as renewed tensions between the US and Iran dampened investor sentiment.

The Nikkei 225 index closed down 931.45 points, or 1.4%, at 67,470.69.

Media reports indicate overnight renewed attacks by the US and Iran, which also involved Kuwait and Bahrain. This is seen as the biggest escalation since a ceasefire took effect in early April. These developments are seen as a threat to the ongoing negotiations between the US and Iran over extending the truce and reopening the Strait of Hormuz.

On the domestic front, Japan's central bank is considering raising the country's policy rate by 0.25% to 1% at its upcoming meeting later this month, Bloomberg reported Thursday, citing sources.

Media reports also quoted Bank of Japan Governor Kazuo Ueda as saying that a rate hike this month is likely if inflation risks outweigh potential economic harm from the Middle East crisis.

On the corporate side, Sumitomo (TYO:8053) signed a deal with U.S. decarbonization startup Graphyte to set up a joint venture for a carbon dioxide removal (CDR) business, according to a Thursday release.

Also, Mitsubishi Electric (TYO:6503) is set to begin shipping samples of two new types of fifth-generation silicon carbide metal-oxide-semiconductor field-effect transistors (SiC-MOSFETs) in bare die form in late June.