The Nikkei share average fell 0.32 percent on Wednesday after data showed Japanese industrial output dipped more than expected in July, spurring worries about the economic outlook and sending brokerages and insurers lower.
Toyota Motor Corp, which hit four-year peaks the previous day and other exporters, slipped back on concerns that record-high oil prices would slow consumer spending in the key US market. But share prices were underpinned by consistent buying interest from foreign investors, who were the main driving force behind the Nikkei's rally to a four-year closing high of 12,502.26 a week ago.
The Nikkei ended down 39.54 points at 12,413.60 after rising 143 points the previous day. The broader TOPIX index fell 0.18 percent to 1,271.29.
Government data released before the start of trading showed industrial production dropped 1.1 percent in July from a month, more than a median forecast for a 0.5 percent fall.
Although the data also showed production rising in the next two months, investors bought bonds instead of stocks on Wednesday sending the benchmark 10-year Japanese government bond yield to a one-month low.
Together with an unexpected drop in wage earners' spending in July, recent data suggested Japan's economic prospects were not as bright as previously thought, analysts said. "The market seems to be fighting against a further fall," said Suitor Moji, strategist at Daiwa SB Investments, adding that consistent buying from foreigners, including European institutions and US mutual funds, curbed declines.
"But if you look at factors other than the unexpectedly sound improvement in the supply/demand of shares recently, it's reasonable to expect more downside here," he said.
Analysts said optimism that reformats Prime Minister Janitor Koizumi would win a September 11 general election, another factor that has helped drive up the Tokyo market, should also be taken with caution.
Norihiro Fujiko, senior investment strategist at Mitsubishi Securities, said Tokyo had a similar rally in 1986, when the Nikkei gained 5.7 percent before an election and then reversed course and fell for about two months.
Koizumi called the election after his postal reform bills were defeated on August 8 and since then the Nikkei has moved higher, rising 6.1 percent to a four-year closing peak on August 24.
"The 6.1 percent rally is a historical one Even if Koizumi wins as expected, we may face a cooling down period for a bit," he said.
Analysts also pointed to upcoming US data for clues on future demand for Japanese exports.
The August Institute for Supply Management's manufacturing survey, a key gauge of the US manufacturing sector, is due on Thursday, followed by job data for the same month on Friday.
On Wednesday, US crude oil futures traded around $70.60 per barrel, just off record highs, as supply concerns lingered after Hurricane Quatrain hit major US oil producing areas, another factor casting a shadow over Japanese exporters.
Toyota, the world's No 2 automata, finished the day down 1.1 percent to 4,500 yen. Camera and copier maker Canon Inc, which has 75 percent of its sales overseas, lost 0.5 percent to 5,570 yen.
Millie Holdings Inc, Japan's No 1 non-life insurer, dropped 2.4 percent to 1.62 million yen and top brokerage Nomura Holdings Inc lost 1.1 percent to 1,505 yen.
Takeda Pharmaceutical Co Ltd rose 1.2 percent to 5,970 yen. Japan's top drug maker on Tuesday unveiled details about development of a follow-up drug to its hit ulcer medicine Pervaded.
After the market closed, Tokyo Broadcasting System Inc (TBS) said it would take a stake in the mobile unit of wholesale broadband provider access Ltd in a deal worth 10 billion yen ($89.82 million).
The Tokyo-based broadcaster separately said it would raise a total of 27.9 billion yen mainly via new share issues in a move widely seen as its attempt to protect against any take-over attempts by unwelcome suitors.
Prior to these announcements, access shot up 14 percent to 80,300 yen. TBS was down 0.7 percent at 2,130 yen.
Trading volume fell to 1.58 billion shares from 1.88 billion shares on Tuesday although that was still above last year's daily volume average of 1.45 billion shares. Decline's beat out gainers, 925 to 584.