The Nikkei average closed at a seven-week low on Tuesday as poor profits at precision equipment maker Nikon Corp on soft digital camera sales spurred selling that included Olympus Corp.
The market was also hampered by a lack of fresh incentives ahead of a Japanese national holiday on Wednesday and as participants looked ahead to US Federal Reserve Chairman Alan Greenspan's congressional testimony this week, traders said.
Hiroshi Fujimoto, a fund manager at Okasan Capital Management Co Ltd, said buying by foreign investors had diminished and the market was succumbing to selling by domestic players keen to trim their stockholdings before book-closings at the end of March.
The Nikkei ended down 0.36 percent or 37.21 points at 10,365.40; it's lowest since December 25. The broader TOPIX index put on 0.05 percent or 0.48 point to 1,025.25.
Nikon led the falls, tumbling 10.35 percent to 1,342 yen after it surprised investors on Monday with a quarterly loss and a downward revision to its full-year forecast. The dim outlook rekindled concerns about severe price competition and tight supplies of key parts in the industry, sending shares of Olympus lower.
Olympus, the world's third-biggest digital camera brand after Sony Corp and Canon Inc, lost 4.48 percent to 1,939. Sony was a tad higher, up 0.94 percent at 4,310 yen and Canon ended unchanged at 5,090 yen.
Other digital products makers lost ground as investors began having second thoughts about these shares, which posted heady gains last month on hopes of future growth.
Sharp Corp, the world's largest maker of liquid crystal display televisions, gave up 2.03 percent to 1,783 yen and Casio Computer Co, a maker of digital cameras and electronic dictionaries, dropped 4.38 percent to 1,026 yen.
Bank shares bucked the bearish tone of the market. Japan's largest banking group, Mizuho Financial Group Inc, rose 3.4 percent to 304,000 yen while number two Sumitomo Mitsui Financial Group gained 4.22 percent to 568,000 yen.
Overall, investors tended to stay on the sidelines as they waited for Greenspan's testimony for clues to if and when the Fed will raise US interest rates.
The Fed took a tiny step last month towards raising rates for the first time since 2000 by dropping a pledge to keep them low "for a considerable period".
Decliners slightly outnumbered gainers 715 to 659. Trading volume edged down to 892.99 million shares from 982 million on Monday and last week's daily average of 1.047 billion.
Another notable loser was video-game maker Nintendo Co Ltd it shed 3.16 percent to 9,800 yen, even after the company denied a news report that it would delay the development of a successor to its GameCube console.
Video-game maker Nintendo Co Ltd drew attention after a news report that it would delay the development of a successor to its GameCube console.
Despite Nintendo's denial, its shares shed 3.16 percent to 9,800 yen.
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