The Nikkei average ended down 0.17 percent on Tuesday as investors took profits in banks, property and other companies whose performance is related to domestic demand and which were judged to be overpriced.
Chugai Pharmaceutical Co Ltd jumped after its parent company Roche Holding AG said there was no clear evidence its flu drug Tamiflu had contributed to the deaths of two Japanese teenagers, as weekend news reports had suggested.
With the corporate earnings season nearing an end and the Nikkei and the broader TOPIX index having hit multi-year highs, analysts said investors had decided to grab profits for now.
"It's natural for the market to take a breather as it had begun to look overheated. Investors were selling stocks to adjust their positions," said Tsutomu Yamada, a market analyst at Kabu.com Securities Co.
Soichiro Monji, a strategist at Daiwa SB Investments, said reduced buying by foreign investors, the main engine of recent rallies, had put a damper on the market.
"Foreign investors may be shifting their money to other Asian stocks," Monji said. "In September and October, only Japanese stocks showed a strong performance."
The Nikkei fell 24.27 points to 14,091.77, while the broader TOPIX index sagged 0.54 percent to 1,472.47.
The bank and real estate sectors, both of which have posted gains of around 10 percent in the last month, became targets for profit-taking.
Mitsubishi UFJ Financial Group Inc, Japan's largest lender, fell 1.3 percent to 1.51 million yen and Mitsui Fudosan Co Ltd, the nation's largest property developer, lost 1 percent to 1,937 yen.
In the technology sector, Sanyo Electric Co Ltd ended up 1.5 percent at 280 yen, although off its earlier high. Investors initially welcomed newspaper reports that the struggling electronics maker would raise capital and revamp its restructuring plan, but they later turned cautious ahead of Sanyo's earnings announcement on Friday.
Sanyo said nothing had been decided on any reported measures.
Some chip stocks gained after industry data showed a smaller decline in global sales of chip equipment in September, a sign that demand for chip-related tools was on a firm recovery track.
Chip-testing equipment maker Advantest Corp was up 2 percent at 9,410 yen and its rival Tokyo Electron Ltd added 1.4 percent to 6,420 yen. Medical mask maker Japan Vilene Co Ltd gained 2 percent to 916 yen and Uni-Charm Corp, another mask maker, gained 1.1 percent to 5,400 yen. They are expected to benefit from government steps on bird flu and from a possible boost in mask sales as the winter flu season approaches.
Chugai leapt 6.6 percent to 2,815 yen as the measures included raising its stockpile of Tamiflu.
Mitsubishi Motors Corp plunged 10.7 percent to a one-month low of 234 yen, extending Monday's 12.4 percent loss. The stock met a flurry of sales after the auto maker said a unit of Goldman Sachs sold to undisclosed parties the 12.4 percent stake in Mitsubishi Motors it bought from DaimlerChrysler AG
Elsewhere, Japan's largest advertising firm Dentsu Inc posted a 20 percent fall in first-half net profit and cut its full-year outlook after the market closed. Its shares ended unchanged at 308,000 yen.
Japan's top oil developer, Inpex Corp, reported a 56.5 percent rise in first-half profit and stuck to its full-year outlook. Prior to the announcement, its shares closed up 2.6 percent at 904,000 yen.
Trade was active, with 2.51 billion shares changing hands on the Tokyo exchange's first section, but fewer than the record 4.56 billion shares hit last week. Decliners outweighed advancers 1,119 to 446.
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