The Nikkei average fell 0.85 percent on Friday as investors grabbed profits in Canon Inc while Asahi Glass Co Ltd fell on a Credit Suisse downgrade, dragging other glass makers down.
In contrast, Honda Motor Co Ltd extended gains while Sony Corp lured buyers who bet that the company's bad news had been largely factored in after it reported a quarterly loss on Thursday. "Judging from the earnings results so far, investors have figured out how much room corporations have for earnings upgrades," which gives them an incentive to take profits for now, said Yasuo Yabe, a director of sales at Meiwa Securities.
"That view may change if we see unexpectedly strong earnings from other companies going forward, making valuations attractive. But so far, we sort of see a limit in the upside potential." The Nikkei declined 142.53 points to 16,669.07, while the broad TOPIX index was down 0.83 percent at 1,650.73.
For the last few months, investors have flocked to blue chip shares, looking for solid returns while the global economy appears to be slowing down. But that could change soon, said Hideo Ueki, chief investment officer at UBS Global Asset Management Japan.
"We may be at the crossroads. Investors may either become cautious and buy defensive stocks or start to think that the global economy will pick up again and buy small-cap shares," he said. "The time when blue chip shares outperform is like an interlude. It doesn't last long." Earnings numbers released after the market closed were mixed.
NTT DoCoMo Inc, the world's second-largest mobile phone operator, reported a bigger-than-expected 7.4 percent drop in first-half operating profit but kept its full-year forecast. Chip equipment maker Advantest Corp posted a profit rise of 52 percent, matching market expectations, but it trimmed its full-year forecast slightly further below market expectations amid slowing momentum in chip testers.
But another technology company, Matsushita Electric Industrial Co Ltd, posted a 21 percent rise in first-half profit and stood by its outlook for a full-year profit gain of 9 percent. Prior to the announcement, shares of Matsushita Electric, a maker of Panasonic goods, fell 1.8 percent to 2,530 yen.
Canon dropped 2.4 percent to 6,490 yen, giving up a fraction of the roughly 19 percent rise it has made in the previous two months. The camera and office equipment giant posted a 15 percent rise in quarterly profit on strong sales of digital cameras and a weaker yen but disappointed some investors by not raising its outlook.
Asahi Glass tumbled 4 percent to 1,399 yen after Credit Suisse downgraded the stock to "neutral" from "outperform", citing the decline in LCD glass substrate prices. The downgrade led other players lower and contributed to a 2.5 percent drop in the glass subindex IGLSS, making it the worst-performing sector.
Honda Motor rose 2.6 percent to 4,270 yen, adding to its 2.2 percent gain from the previous session, as investors continued to buy on Japan's third-largest auto maker's upgrade of its full-year forecast. Nikko Citigroup also nudged up its target price for Honda to 5,300 yen from 5,250 yen. Another notable winner was Sony, which climbed 1.2 percent to 4,880 yen.
SBI Holdings Inc shares dropped 3.8 percent to 42,650 yen following media reports that tax authorities had accused the venture capital firm of hiding taxable income.
Trade volume was little changed from the previous three sessions, with 1.80 billion shares changing hands on the Tokyo exchange's first section. Declining shares beat advancers by a ratio of more than three to one.
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