The Nikkei shed 0.52 percent on Tuesday, halting a three-session winning streak, as property shares such as Mitsubishi Estate Co Ltd slid on concern that their prices may have outpaced their potential earnings, while a firmer yen prompted selling of some exporters.
Shares in security brokers and steel producers including Nippon Steel Corp also lost ground as investors locked in profits on recent gainers after the Nikkei ended at a seven-year high for the third straight session on Monday.
But utility shares including Tokyo Electric Power Co Inc advanced as speculation of an industry shake-up was ignited by news that Texas power company TXU Corp agreed to be acquired for $32 billion in the largest leveraged buyout in history. Drug shares such as Takeda Pharmaceutical Co Ltd rose as investors bought shares with attractive dividend yields.
"It's time for the market to pause after the Nikkei added about 1,000 points in the past two weeks," said Yoshinori Nagano, chief strategist at Daiwa Asset Management. Underlying sentiment remained positive, as the dollar was supported above 120 yen and a soft-landing scenario for the US economy stayed alive despite recent mixed economic data, he said.
"I don't think the Nikkei will slip back below 18,000 in the near term," he added. The Nikkei closed down 95.43 points at 18,119.92 after gaining 0.15 percent to 18,215.35 on Monday, its highest close since early May 2000. The broader TOPIX index was down 0.31 percent at 1,811.33.
Hiroyuki Fukunaga, chief strategist at Rakuten Securities, said selling in the futures market accelerated in the afternoon session, dragging the Nikkei lower. But investors continued to buy laggards such as telecommunications shares, making the market's downside solid.
Technically the Nikkei was not overbought, as its closing price on Tuesday was 2.6 percent above its 25-day moving average at 17,664.78. Fukunaga said a rise of 5 percent above the average is normally seen as a sign of overheating.
Trade volume remained highly active, topping 3 billion shares on the Tokyo exchange's first section for the second straight day and only the third time this year. Declining shares outnumbered advancers by a ratio of nearly two to one.
Shares of Mitsubishi Estate, Sumitomo Realty & Development Co Ltd and other property firms declined as investors worried that stock prices may have outpaced potential earnings. Sumitomo Realty fell 5 percent to 4,930 yen, having gained 54 percent over the past three months. The company now has a price-to-earnings ratio of 46, well above the average of 21 for the Nikkei 225, according to Reuters data.
Shares of Mitsubishi Estate fell 3.1 percent to 3,790 yen. The property firm has advanced nearly 50 percent during the last three months. It has a price of nearly 60 times its estimated earnings per share.
Takeda Pharmaceutical rose 1.6 percent to 8,320 yen. The stock has an estimated dividend yield of 1.4, above the average of 1.03 for the Nikkei 225, according to the latest Reuters data.
Likewise Astellas Pharma Inc gained 1.3 percent to 5,310 yen, helped by a dividend yield of 1.5. Tokyo Electric Power rose 2.4 percent to 4,260 yen. Shares of Japan's three major mobile-phone carriers rose following a brokerage upgrade. NTT DoCoMo Inc, KDDI Corp and Softbank Corp all advanced after Mizuho Securities raised its ratings on the three.