Tokyo's Nikkei average snapped a three-day winning streak on Monday as the market's recent rally made investors nervous, prompting them to cash in profits on recent high-flyers such as builders and steel makers.
The yen's advance towards a three-and-a-half-year high against the dollar also weighed on several exporters including Sony Corp But gains in several technology and telecom stocks helped prevent the market from falling further.
The benchmark Nikkei fell 0.45 percent to close at 11,718.24, snapping a three-day, 480-point rally. The Nikkei earlier rose as high as 11,843.34, its best intraday level since June 4, 2002.
But the broader TOPIX index rose for a fifth straight day, adding 0.24 percent to reach 1,179.17, its highest close since August 2001.
"Overall market sentiment is still firm, but caution started emerging and short-term investors were seen starting to cash in profits," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Securities.
"Also, there are growing concerns that the market's recent rally has boosted domestic-related stocks too much."
Steel makers met profit-taking, with JFE Holdings Inc, Japan's second-largest steel maker, falling 3.45 percent to 2,800 yen and Nippon Steel Corp losing 1.23 percent to 241 yen. The steel sector sub-index lost 1.52 percent, after soaring more than 11 percent last week.
General contractor Taisei Corp fell 5.05 percent to 432 yen after hitting a 35-month intraday high on Friday.
Mid-sized general contractor Ando Corp fell 3.88 percent to 248 yen, after having risen more than 40 percent since the start of this month.
But NTT DoCoMo Inc, Japan's dominant mobile phone operator, rose 2.7 percent to 228,000 yen and Vodafone Holdings KK climbed 3.77 percent to 248,000 yen.
Tokai Tokyo's Nakai said more people were starting to see telecoms as a domestic business-oriented sector.
He also said telecom stocks were seen as lagging steel and other domestic stocks that have marked hefty gains in recent sessions.
Trading edged down, with 1.467 billion shares changing hands on the first section, the lowest total since Monday last week and down from 1.69 billion shares on Friday. Gainers outnumbered decliners 822 to 631 on the first section.
Technology stocks ended mixed, despite some optimism before the market opened that stability on Wall Street might spur investors to switch their buying targets to heavily weighted techs from domestic business-oriented stocks.
Some investors also took to the sidelines ahead of key economic data, including industrial production, due out on Tuesday, analysts noted.
Japan's industrial production likely fell 3.4 percent month-on-month in February after strong export-led growth the previous month, a Reuters poll showed.
The data, along with employment figures, is due before the market opens.
Consumer electronics giant Sony fell 1.14 percent to 4,320 yen and Hitachi Ltd shed 0.6 percent to 824 yen.
But office equipment giant Canon Inc rose 1.88 percent to 5,410 yen and NEC Corp picked up 0.93 percent to 870 yen.
Hirokazu Toyoshima, a fund manager at Nikko Asset Management, said there were few attractive sectors in Monday's market as buyers had already hoarded domestic business-related stocks in the past few weeks and the market's rally in the past three days had also boosted technology stocks.
"Both domestics, like steel makers, and tech stocks are fairly valued now. Investors are now scratching their heads about which sector to invest in next," Toyoshima said.
"It's a really tough decision to make given uncertainties in the US economic recovery and the speed of future growth in China's economy," he added.
"Investors are becoming very picky as the Nikkei nears the 12,000 level.
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