"There may be concern about the possibility of some disorder in parliament," said Kiyoshi Noda, chief fund manager for MU Investments. "But the reason equities have been rising has a lot to do with the strength of external demand, and I do not think market players have switched from that scenario," Noda said, referring to market expectations for a recovery in the global economy to continue.
The benchmark Nikkei fell 127.02 points to 10,855.08 after rising 0.7 percent on Friday to its highest finish since October 2008. The broader Topix retreated 0.9 percent to 957.55. Commodity trading advisers and hedge funds likely took positions on Friday in Asian stocks, particularly Japanese shares, expecting that US stocks would climb, said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.
"Disappointing earnings from J.P. Morgan triggered a fall on Wall Street and that is forcing these investors to reverse their positions," he said. "These foreign investors, who have supported the Tokyo market since December, are also reluctant to take positions as US markets will be closed overnight, also dampening the market's recent upward momentum." US markets will be closed on Monday for Martin Luther King, Jr. Day.
Although Japanese shares underperformed compared to their overseas peers for the whole of 2009, they enjoyed a stellar December and have stayed on a solid footing so far in January, with the broader Topix having risen 5.5 percent this month compared to a roughly 2 percent gain in MSCI's index of global shares.
The dollar's rebound off a 14-year low against the yen hit in late November, as well as strengthening expectations for a steady recovery in the United States, have helped buoy Japanese equities in the past couple of months, market players said. Shares of companies that have recently booked sharp gains amid the broad market rally lost ground on Monday on concern that their prices may have advanced too far. Shares in Panasonic Corp, the world's largest plasma TV maker, fell 1.2 percent to 1,534 yen. Shares of Panasonic have risen roughly 19 percent in the past month.
Other declining shares included Nippon Oil, which fell 2.9 percent to 432 yen after Iraq's oil minister said on Sunday a group of companies led by the Japanese refiner was "stalling" in talks to develop the Nassiriya oilfield and that a deal had to be done by January 24 or Iraq would go it alone. Trading volume on the Tokyo exchange's first section fell back to 2.4 billion shares after hitting seven-month highs last week above 3 billion shares. Declining stocks outnumbered advancing ones by more than 2 to 1.