The yen's rise and a funding scandal embroiling the No 2 executive in Japan's ruling Democratic Party, has helped strengthen moves toward profit-taking, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "Since the market rose pretty sharply towards the end of last year and at the start of the new year, market players have a strong desire to lock in profits," Akino said.
The Nikkei fell 90.18 points to 10,764.90. The index has faltered after hitting 15-month highs last week. The broader Topix dropped 0.8 percent to 949.76. Shares in Japan Airlines were unchanged on the day at 5 yen. The airline, which is set to file for one of the country's largest ever bankruptcies on Tuesday, has lost more than 90 percent of its market capitalisation since the start of the month.
About 2.3 billion shares traded hands on the Tokyo exchange's first section, off seven-month highs above 3 billion shares hit last week. Trade in JAL accounted for about 18 percent of the overall trade on the first section. Declining stocks outnumbered advancing ones, 845 to 682.
A focal point for the market is whether the recent buying by overseas investors will continue. Ministry of Finance data released last week showed that foreign investment in Japanese stocks surged to 733 billion yen for the week of January 3-9, the highest since July 2007.
"Until last week, overseas pension funds had been buying, mainly among the core 30 shares, " said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities, referring to some of the Tokyo exchange's largest companies by market value. On Tuesday, however, most shares in the Topix core 30 of leading Japanese firms fell, including exporters such as Honda Motor, which dropped 2.1 percent to 3,300 yen.
Among other Japanese exporters, Toyota Motor Corp lost 1.2 percent to 4,140 yen and Canon Inc fell 1.4 percent to 3,810 yen. Gainers included Hitachi Ltd, which rose 2.7 percent to 303 yen after Nomura Securities raised its rating on the electronics maker to "buy" from "neutral", citing the company's stronger financial standing following its fund-raising in December.