TOKYO The Nikkei ended a four-day winning run on Tuesday as investors took profits in exporters, which had rallied on hopes Japan's main opposition party would win next month's election and pressure the central bank for more stimulus steps.
But losses were limited as investors switched into sectors which have lagged the rally, such as telecoms and retailers.
The Nikkei .N225 ended 0.1 percent lower at 9,142.64 after surging 5.7 percent in the previous four sessions, driven by a call by Liberal Democratic Party leader (LDP) Shinzo Abe for the Bank of Japan to further stimulate the ailing economy, including pushing interest rates to zero or below zero.
His campaign has weakened the yen against the dollar, fuelling a bounce in the shares of Japanese exporters, which face sluggish demand for their products amid stuttering global growth.
Exporters that came under pressure on Tuesday included Canon Inc (7751.T), Honda Motor Co (7267.T), TDK Corp (6762.T) and construction machinery maker Komatsu Ltd (6301.T), all down between 0.9 and 1.1 percent.
Panasonic Corp (6752.T) sagged 3.8 percent as investors locked in profits and after Deutsche Bank cut its target price on the consumer electronics maker.
"A lot of the sectors have been overbought out there ... It's just a healthy consolidation," a senior dealer at a foreign brokerage said. "There are still a lot of expectations for the LDP."
In its last meeting before the December 16 election, the Bank of Japan kept monetary policy steady on Tuesday, standing its ground for now in the face of calls from the country's likely next prime minister to pursue "unlimited" easing.
"Investors have started to review what Abe has said and are being careful not to have too many expectations for everything he has said," said Takuya Takahashi, a market analyst at Daiwa Securities. "The market is skeptical that the BOJ would give in to every demand."
The broader Topix .TOPX index was flat at 762.04 in relatively active trade, with 1.87 billion shares changing hands, down from Monday's 2.01 billion but up from last week's average of 1.79 billion.
Mobile operators Softbank Corp (9984.T) and KDDI Corp (9433.T) rose 1.9 and 0.7 percent respectively, while index heavyweight Fast Retailing (9983.T), the owner of casual fashion chain Uniqlo, added 0.3 percent.
Shippers .ISHIP.T rose 1.8 percent as the top performing sector after the Baltic Exchange's main sea freight index .BADI, which tracks rates for ships carrying dry bulk commodities, rose for a seventh straight day on Monday after increased rates in the capsize and panamax shipping segments.
Morgan Stanley MUFG said Japanese equities would benefit from a weaker yen through the expected rise in company earnings per share. The benchmark Nikkei is up 8.1 percent this year, lagging a 10.3 percent rise in the U.S. S&P 500 .INX and a 9.8 percent gain in the pan-European STOXX Europe 600 .
"Under a weaker yen scenario, we prefer IT, industrials, discretionary and financials over staples," the brokerage said in a note.
But it added that a soft yen and setting an inflation target would not be enough to change investors' expectations for longer-term return on equity (ROE) or growth in Japan. "The latter depend on fiscal improvement, and on higher nominal GDP, tax revenue and wages," it added.
Japanese stocks carry a 12-month forward ROE of 7.3 percent, much lower than S&P 500's 15 percent and STOXX Europe 600's 12.5, data from Thomson Reuters Datastream showed.
Within the financial sector, NKSJ Holdings (8630.T) sank 4.4 percent after the non-life insurer forecast a full-year net loss of 28 billion yen ($345 million), versus its previous estimate of a profit of 24 billion yen, to reflect a lower assumption for net capital gains due to an increase in impairment losses. ($1 = 81.1350 Japanese yen)
(Additional reporting by Ayai Tomisawa; Editing by Richard Pullin)