* Nikkei braces for fall for 2016, 1st annual fall in 5 years
* Takata soars on hopes it could settle charges with US
* Toshiba gains after falling about 40 pct in 3 days
By Ayai Tomisawa
TOKYO, Dec 30 (Reuters) - Japan's Nikkei share average dropped to a three-week low on Friday morning as investors took profits from the recent gains on the last trading day of 2016.
Takata Corp was under the spotlight again, surging as much as 21 percent to hit the daily limit up on news that the company could settle criminal charges with the U.S. Department of Justice before the Obama administration leaves office next month.
The Nikkei was down 0.7 percent to 19,008.16 in midmorning trade, after falling to as low as 18,991.59 earlier, the lowest level since Dec. 9.
The index looked set to end the year with a drop of about 0.1 percent after a more than 15 percent rally in the fourth quarter, but it could turn around depending on trade in the afternoon.
"Since Japanese stocks have risen sharply since November, profit-taking is natural. Now people are watching whether the Nikkei will end positive or negative for the year," said Chihiro Ohta, general manager of investment research at SMBC Nikko Securities.
Japanese stocks have surged in the four years since Prime Minister Shinzo Abe took office, with the Nikkei hitting an almost two-decade high in June 2015, on hopes his Abenomics policies of monetary stimulus, fiscal expansion and structural reform would end decades of deflation and stagnation.
Attention has shifted to U.S. politics and economic growth after Donald Trump's surprising election to U.S. president last month.
Japanese equities were buoyed by the yen's weakness against the dollar on expectations that the incoming administration would boost U.S. growth and stoke inflation via increased infrastructure spending, tax cuts and reduced regulation.
"The Japanese market has been largely influenced by global events this year such as Brexit and U.S. election. For the next year, the market continues to prepare for risks such as whether Trump can proceed with the policies that he has been promising," said Kazuhiro Takahashi, an equity strategist at Daiwa Securities.
All subsectors except pharmaceuticals were in negative territory, with real estate, sea transport and iron stocks underperforming.
Mitsui Fudosan dropped 1.7 percent, Mitsubishi Estate shed 1.2 percent, Mitsui OSK Lines declined 1.5 percent and Nippon Steel & Sumitomo Metal tumbled 1.9 percent.
Exporters languished as well. Honda Motor Co dropped 1.5 percent, Nissan Motor Co fell 1.1 percent and Panasonic Corp declined 1.2 percent.
Toshiba Corp rebounded 7.9 percent, after nosediving about 40 percent and wiping about $6.5 billion off of its market value in the past three days until Thursday. The company said earlier this week that it faces a potential multi-billion dollar writedown.
The broader Topix dropped 0.5 percent at 1,510.31 and the JPX-Nikkei Index 400 fell 0.6 percent to 13,539.23. (Reporting by Ayai Tomisawa; Editing by Eric Meijer)