Selling came after the Bank of Japan (BoJ) eased monetary policy on Thursday afternoon by expanding its asset-buying and lending programme. 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 programme 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 programme 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 jumped 10.7 percent on Thursday, extending a 33 percent rally over the past three sessions.
Automakers were among the worst sectoral performers amid a 5.5 percent slump in Mitsubishi Motors Corp, after the company said it would recall about 1.2 million minicar vehicles in Japan due to faulty engine oil seals. Honda Motor Co lost 1.8 percent. Nissan Motor Co sank 7.4 percent, also hurt by a rating cut by Nomura, which said there was a risk of deterioration in short-term earnings.
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 US S&P 500 and a 15.2 percent gain in the pan-European STOXX Europe 600. The broader Topix 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 signalling that a correction may be imminent.