TOKYO (Reuters) - Japan's Nikkei share average dropped on Monday as investors took profit on exporters as they awaited further cues from corporate earnings after the index briefly pierced a fresh 32-month high above 11,000 in early trade.
The Nikkei fell 0.9 percent to 10,824.31 after initially leaping to 11,002.86 as interest in Japanese exporters was fanned as the yen dropped to 91 versus the dollar, promising higher overseas revenues once they are repatriated.
The Nikkei has gained about 25 percent since mid-November on hopes that Japan's new prime minister, Shinzo Abe, will pursue aggressive policies to beat the country's prolonged deflation, including pressuring the central bank for further monetary easing.
Analysts said sharp rallies in the Japanese market are merely backed by expectations, and companies have yet to prove that their fundamentals have recovered, thus the market is prone to a correction.
"We haven't seen the numbers yet. The market is seen having reached its upside as it is running ahead of the reality...investors at domestic institutions remain cool about companies' fundamentals," said Yutaka Yoshino, chief technical analyst at SMBC Nikko Securities.
But Yoshino said that the Japanese market is expected to rise further in the long term if the current weak yen trend continues.
"The recent rally is just the start of a long-term rise. The market has yet to recover from its pre-Lehman levels (of above 12,000)," Yoshino said.
Despite the recent rallies, the Nikkei remains well below the 2008 financial crisis while the Standard & Poor's 500 Index and Germany's benchmark stock index have both already exceeded that level.
Yoshino added that the Nikkei was expected to breach the 12,000-level around April-June as the effects of a weaker yen would start filtering through to corporate bottom lines then.
Reflecting this prospect, Sony Corp (6758.T) outperformed most exporters, jumping 9.1 percent after Citigroup raised its rating to "buy" from "neutral", saying the softer yen has enabled Sony to take more risks on operations such as the home appliance business.
Exporters lost ground on profit-taking as the yen's weakness against the dollar paused after trading below 91 yen to the dollar.
Toyota Motor Corp dropped 0.6 percent, Nikon Corp shed 0.9 percent and Toshiba Corp (6502.T) fell 1.3 percent.
With Japan's earnings season getting into full swing this week, investors are hoping that the yen's more than 10 percent fall against the dollar in the past two months will improve Japanese companies' forecasts in the year to come.
But the yen effect may not be enough to offset slowing demand in China, exacerbated by a diplomatic spat that chilled interest in Japanese products, as well as an ongoing EU debt crisis that has severely crimped consumption in the region.
Industrial robots maker Fanuc Ltd (6954.T), which tumbled 7.0 percent, cited both of those reasons when it cut its operating forecast for the year ending March by almost 20 percent to 178 billion yen after the bell on Friday.
Fanuc also said its operating profit for the nine months ended December had dropped 13.4 percent from the previous year, hurt by a yen that remained strong for much of that year.
"We've got big tests in the coming week, like Fanuc coming out with weak numbers, and I don't think the judgment is over on that yet. Four percent down is not a shock," said Stefan Worrall, director of equity cash sales at Credit Suisse.
"It does matter if euphoria has got ahead of itself. A lot of these stocks have already ripped on a pretty bullish macro outlook," Worrall added.
Advantest Corp (6857.T) shed 5.3 percent after the Nikkei business daily said the chipmaker's operating profit for the year ending March was expected to undershoot expectations as it likely suffered an operating loss of 2 billion yen in the last quarter due to slowing iPhone 5 sales.
GS Yuasa (6674.T), who makes batteries for Boeing Co's (BA.N) Dreamliner, jumped 4.8 percent, marking its biggest one-day percentage gain in eight months, as Japanese investigators said there was no indication that the damaged battery on the 787 passenger jet that made an emergency landing on January 16 was the issue.
The stock is still down 5.7 percent since the battery of another Dreamliner caught fire at the Boston airport on January 7. U.S. investigators have still not determined the cause of the battery fire and said 'no obvious anomalies were found" in its initial investigation of an undamaged battery aboard the plane.
The broader Topix shed 0.4 percent to 913.78 in relatively thin trade, with 3.07 billion shares changing hands, compared to last week's average daily volume of 3.44 billion shares.
Additional reporting by Sophie Knight; Editing by Jacqueline Wong