Japan's Nikkei share average dropped 0.82 percent on Tuesday as Advantest Corp and other technology shares were sold on concern that their prices had risen too rapidly during the benchmark's run to a five-year high.
Household products maker Kao Corp soared 4.5 percent to 3,120 yen after a news report said it and three private equity funds were the top contenders to acquire troubled cosmetics and food group Kanebo.
Toyota Motor Corp and other auto stocks fell as investors took advantage of a pause in the dollar's rise against the yen to book profits, while some bank shares gained on a Goldman Sachs upgrade.
Fujio Ando, Chibagin Asset Management's senior managing director, said the pace at which the market had risen was rapid but prices were not necessarily high considering the strong upward trend for corporate earnings.
"If the economy is in better shape next year than this year, we can buy more stocks," Ando said.
Nomura Securities said in a report on Monday it expected Tokyo's broad benchmark Topix index to rise 9 percent in 2006 to 1,800, upgrading its view of the market partly due to the likelihood that corporate earnings would keep growing.
The tech-sensitive Nikkei ended down 127.93 points at 15,423.38. On Monday, it closed at its highest since October 2000.
The TOPIX index fell 0.39 percent, or 6.23 points, to 1,591.34.
Advantest, the world's largest maker of microchip-testing devices, led the Nikkei's drop, falling 3.6 percent to 11,270 yen, after the stock gained 36 percent in the last month.
Matsushita Electric Industrial Co Ltd dropped 3.4 percent to 2,395 yen, off a four-year high of 2,515 yen marked last month.
Auto stocks were under profit-taking pressure with Toyota falling 1.2 percent to 5,840 yen and Honda Motor Co Ltd declining 2.1 percent to 6,960 yen. The dollar bought around 120.95 yen in Tokyo, off Monday's 32-month high of 121.40.
Meanwhile bank stocks gained ground after Goldman Sachs raised its rating on Resona Holdings Inc to "in-line" from "underperform", Mizuho Financial Group Inc to "outperform" from "underperform" and Sumitomo Mitsui Financial Group Inc to "outperform" from "in-line".
Resona jumped 4 percent to 442,000 yen, Mizuho gained 3.6 percent to 926,000 yen and Sumitomo Mitsui rose 3.5 percent to 1.19 million yen.
Canopus Co Ltd, a high-definition video-editing software maker, shot up 12.1 percent to 148,000 yen after French firm Thomson said on Monday it planned to buy Canopus for about 91.3 million euros ($107.6 million) partly through a public tender offer.
Top Japanese auto parts maker Denso Corp said on Tuesday it would spend $185 million to expand its manufacturing facility in Tennessee by 2010, creating about 500 new jobs. The stock ended down 1.5 percent to 3,840 yen.
Trade activity was lower, with 3.00 billion shares changing hands on the Tokyo exchange's first section. The previous session's level of 3.7 billion shares was the most active trade in four weeks. Decliners beat advancers 1,136 to 462.
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