The S&P 500 suffered its biggest decline in nearly two months on Wednesday as Goldman Sachs posted a 53 percent drop in profit on a tumble in trading revenue and Wells Fargo's fourth-quarter profit came below some analysts' estimates.
Foreign investors were net buyers of Japanese equities last week for the 11th straight week, with buying at a 9-month high, data showed on Thursday, but market players said the trend could be nearing its end since the Nikkei has gained 14 percent since the start of November.
"The Nikkei may be entering a small, healthy correction. After U.S. earnings some people are worried that estimates for Japanese firms to post strong profits may have been a bit over the top," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Analysts added that the recovery in earnings has been priced in by investors and once most Japanese firms have reported at the start of February, traders may consolidate positions below 10,500, with the timing and size of a correction determined by the exact figures and the dollar/yen rate.
"Traders won't aggressively buy shares of companies even after fairly strong earnings, and because the market is overheated some drop is to be expected around the beginning of February," said Hideyuki Ishiguro, a supervisor in the investment strategy section of Okasan Securities.
The benchmark Nikkei ended down 1.1 percent or 119.79 points at 10,437.31.
The broader Topix index shed 1 percent to 927.19.
"The sharp fall in tech shares on Wall Street is prompting investors to take profits on chipmakers that have outperformed the market in recent weeks," said Shoji Yoshigoe, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co Ltd.
Technology shares were the worst performers on Wall Street on poor results from Cree and other LED lighting makers.
In Tokyo, Elpida Memory Inc, the world's third-biggest DRAM maker, lost 3.9 percent to 1,117 yen. Tokyo Electron Ltd fell 3.8 percent to 5,530 yen.
Trading volume slipped, with 2.0 billion shares changing hands on the Tokyo Stock Exchange's first section, below last week's average of 2.3 billion.
BANKS, EXPORTERS FALL
Sentiment was also soured after data showed China's economy had grown more than expected in the fourth quarter, heightening concerns that China may tighten monetary policy further.
For the first time this year more than 1,000 shares had declined, with 1,245 issues lower and only 305 gaining, indicating market confidence has been dented, brokers said.
Banking shares fell in heavy trade following Goldman's weaker-than-expected results.
Mitsubishi UFJ Financial Group, Japan's biggest bank by assets, lost 1.1 percent to 455 yen, while Sumitomo Mitsui Financial Group slipped 1.6 percent to 3,005 yen.
"A slightly stronger yen against the dollar is pressuring exporters and the fall in these large-cap shares is weighing on the whole index," added Daiwa's Ogawa.
Canon Inc dropped 2.3 percent to 4,100 yen and Nissan Motor Co slipped 1.7 percent to 835 yen.
Bucking the trend was Daihatsu Motor Co, which rose 1.4 percent to 1,330 yen. Industrial daily Nikkan Kogyo Shimbun reported that Daihatsu, the minivehicle unit of Toyota Motor Corp, plans to raise its annual output capacity at an Indonesian factory by 50,000 units to 330,000 vehicles around May.