The Nikkei average fell for the first time in five sessions on Wednesday, declining 0.73 percent after a series of missile tests by North Korea raised fears about security in Asia. Shares of some of Japan's flagship firms were among the decliners, with auto makers Honda Motor Co Ltd and Nissan Motor Co Ltd both dropping about 2 percent.
The reclusive communist state test-fired at least six missiles, including a long-range weapon said to be capable of reaching Alaska. The launches were likely to raise concern among investors about security in the region, said Kirby Daley, a strategist at the brokerage Fimat. "It's definitely a factor that will cause fund managers to be more cautious in their long positions in Asia, especially Japan and South Korea," he said.
However, the absence of aggressive selling meant investors saw the immediate risks as limited, Daley said. "Today's market reaction shows that we're not going to see capital flight right away. I am encouraged by the lack of a major knee-jerk reaction sell-off." The Nikkei ended down 114.56 points at 15,523.94, snapping a four-day winning streak. The TOPIX index lost 0.78 percent to 1,589.97.
Honda gave up 2.2 percent to 3,600 yen while Nissan fell 1.9 percent to 1,239 yen. Mitsubishi UFJ Financial Group Inc, the world's largest bank in terms of assets, declined 1.2 percent to 1.6 million yen.
The missile launches could prompt some foreign investors to sell some Japanese stocks out of security concerns, said Koichi Ogawa, a chief portfolio manager at Daiwa SB Investments. "While I don't think this is anything that will have an impact on the US market, investors such as hedge funds are very influential and if they decide to short-sell Japanese stocks that would be trouble for the Japanese market."
Foreign buying was a key driver behind the Nikkei's 40 percent advance last year. US markets were closed for the Independence Day holiday on Tuesday, making it difficult to judge how some foreigners would react to the news of the missile launch, Ogawa said.
Elsewhere, Sumitomo Rubber Industries Ltd, Japan's second-biggest tyre maker, slid 10.6 percent to 1,062 yen, becoming the latest company to cut full-year earnings forecasts due to higher raw material costs. Sumitomo Rubber said it now expects a 34 percent fall in group net profit to 17 billion yen ($148 million) in 2006, instead of its previous forecast of a 9 percent rise in profit.
Shares of Promise Co Ltd and other consumer finance firms declined following domestic media reports that a ruling party subcommittee had moved closer to lowering the interest-rate cap for consumer loans.
Promise slid 8.5 percent to 6,060 yen. Rival Aiful Corp fell 7 percent to 5,600 yen. Their declines led to the non-bank financial sector index becoming the biggest faller among the TOPIX's 33 subsectors.
Shares of defence-related companies such as Mitsubishi Heavy Industries Ltd gained ground as investors bet that tension with North Korea could lead to an increase in defence spending. Mitsubishi Heavy, one of Japan's leading makers of defence equipment, added 0.4 percent to 496 yen.
Ishikawa Seisakusho Ltd, a textile machinery maker also involved in the production of defence equipment, surged 17.2 percent to 191, becoming the biggest gainer on the Tokyo Stock Exchange's first section. Trading volume edged down for the third straight session, with 1.52 billion shares changing hands on the Tokyo exchange's first section. Decliners more than doubled gainers, 1,143 to 436.