TOKYO Japan's Nikkei average ended flat on Wednesday and failed to top the key 9,800 level as investors took profits before a liquidity operation by the European Central Bank, but the index still logged its best February performance in two decades.
The Nikkei ended flat at 9,723.24 after earlier jumping as high as 9,866.41.
"We went too far yesterday. We are taking some profits here. People are not really on the bull market wagon, so they are trying to make some money and then get out as long as they can," a trader said. "Volumes are okay, but not great."
The benchmark gained 10.5 percent this month, logging its best February performance since 1991, shrugging off negative news from Elpida Memory Inc's bankruptcy filing this week.
A Reuters poll showed that Japanese fund managers turned bullish on stocks in February after surprise easing steps announced by the Bank of Japan earlier this month boosted risk appetite and underpinned investor confidence.
Domestic fund managers raised weightings in Japanese equities for three months in a row to 35.1 percent in February, the highest level since the survey began in 1995.
Shares of Elpida, Japan's last remaining PC memory chipmaker, tanked 97.2 percent to 7 yen.
Chip-related shares jumped after Daiwa Securities Capital Markets upgraded the sector to "positive" from "neutral," helping them easily recover ground after the sector fell a day earlier on the back of Elpida.
Advantest Corp (6857.T) rose 2.3 percent, while Sumco Corp (3436.T), the world's No.2 maker of wafers used to make semiconductors, jumped 1.5 percent.
Other big gainers included Panasonic Corp (6752.T), up 1.5 percent after the electronics company named the head of its loss-making TV business as its new president and pledged to get its TV division back on track within two years.
Toshiba Corp advanced 1.4 percent to a four-month intraday high of 356 yen after it agreed to buy some production equipment from hard-drive manufacturer Western Digital Corp in March.
The broader Topix shed 0.3 percent to 835.96.
With investors aggressively moving out of Elpida, trading volume on the main board rose to the highest since August 9, with roughly 3.06 billion shares changing hands on Wednesday, up from 2.51 billion shares on Tuesday.
Elpida accounted for a little over 20 percent of all the volume on the main board.
Technical indicators showed the Nikkei was ripe for a pullback. The index was deep in "over-bought" territory, with the 14-day relative strength index at 82, while the slow stochastic, a short-term momentum indicator, also pointed to a retreat.
"From a technical view point, the market is overheated. We may see a correction in the very short term," said Hisao Matsuura, equity strategist at Nomura.
"Fundamentally, Japan is improving and investors will buy Japanese equities...which will push the market higher," he said, adding that a weaker yen would also help.
Nomura has a Nikkei target of 10,250 for 2012, or an upside of 5.1 percent from the current level.
The dollar was last trading at 80.30 yen, off the nine-month high of 81.661 yen hit earlier this week.
"Everyone is out there saying that the market is 'overheated' and warning about a correction but that momentum is what's helping the benchmark return to last year's highs. You have to keep in mind that these gains are still a return to last July's levels," said Hiroyuki Fukunaga, CEO of investment advisory firm, Investrust.
The Nikkei failed to close above an important chart resistance looming around 9,835, formed by the 61.8 percent retracement of its slide from the 2011 high hit in February to that year's low plumbed in November.
Global equities have been buoyed by a run of strong U.S. economic data, the European Central Bank's nearly half a trillion euro liquidity injection late last year and further easing steps by the Bank of Japan and the Bank of England.
According to Thomson Reuters Datastream, the Topix carries a 12-month forward price-to-book ratio of 0.91, much cheaper than S&P 500's 1.94 and the STOXX Europe 600's 1.35.
Investors will focus on Wednesday on the size of the ECB's longer-term refinancing operation gross allotment, as well as net new liquidity. A Reuters poll showed 30 euro money market traders expected the ECB to allot 500 billion euros.
(Writing by Antoni Slodkowski; Editing by Michael Perry)