TOKYO (Reuters) - Japan's Nikkei average dropped on Thursday in active trade after the central bank's third dose of monetary stimulus disappointed the market and triggered profit-taking, although the index managed to end above 10,000.
The Nikkei .N225 shed 1.2 percent to 10,039.33, after surging 2.4 percent on the previous day to 10,160.40, logging its biggest one-day percentage rise since September 2011.
Selling came after the Bank of Japan (BOJ) eased monetary policy on Thursday afternoon by expanding its asset-buying and lending program.
It was a widely expected move in response to intensifying pressure from incoming Prime Minister Shinzo Abe for the BOJ to deliver bolder steps to beat deflation.
The central bank topped up its asset-buying and lending program by 10 trillion yen to 101 trillion yen by a unanimous vote, expanding stimulus for the third time in four months.
"Some investors were disappointed with the BOJ's asset-buying amount. It expanded the program by 10 trillion yen for both short-term and longer-term bonds, but investors were expecting as much as 10 trillion yen on just buying longer-term bonds," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
The BOJ's shares 8031.OS jumped 10.7 percent on Thursday, extending a 33 percent rally over the past three sessions.
The bank also signaled a review of its current 1 percent inflation target at its next policy-setting meeting in January, when Abe will have a new cabinet in place ready to negotiate with the central bank.
"Abe has been demanding an inflation target of 2 percent, but the bank postponed the decision about this without elaborating," Fujito said.
Automakers were among the worst sectoral performers amid a 5.5 percent slump in Mitsubishi Motors Corp (7211.T), after the company said it would recall about 1.2 million minicar vehicles in Japan due to faulty engine oil seals.
Abe, whose opposition Liberal Democratic Party won Sunday's election by a landslide, has called for the BOJ to adopt bolder policy action, including embarking on "unlimited easing" and setting an inflation target of 2 percent. His comments have softened the yen, which boosts the appeal of exporters' shares.
Analysts said there may be a correction in the market by the end of the year without good news on U.S. "fiscal cliff" talks.
"The market has started taking profits as hopes for aggressive easing have been priced into the current market for the rest of the year," said Fujio Ando, senior managing director at Chibagin Asset Management.
"If there is progress in talks on the U.S. 'fiscal cliff', the market may rise further, but if not, the market may shed as much as a third of what it has gained over the past month or so."
The Nikkei has rallied 15.9 percent over the past five weeks, taking its year-to-date gain to 18.7 percent, ahead of a 14.2 percent rise in the U.S. S&P 500 .INX and a 15.2 percent gain in the pan-European STOXX Europe 600 .
U.S. President Barack Obama and congressional Republicans are struggling to come up with a deal to avoid a fiscal cliff of $600 billion in tax hikes and spending cuts, scheduled to start in January, which many economists say could send the U.S. economy into recession.
The broader Topix .TOPX was down 0.1 percent at 838.61 in active trade, with 3.74 billion shares changing hands on the board, compared with last week's daily average of 2.29 billion shares.
Despite Thursday's fall, the Nikkei was still deep in "overbought" territory, with its 14-day relative strength index at 75.67, way above 70 which is deemed overbought and signaling that a correction may be imminent.
Editing by Chris Gallagher and Muralikumar Anantharaman; Editing by Michael Perry