By Tomo Uetake
TOKYO (Reuters) - Japan's Nikkei share average fell on Thursday as financials and exporters dropped, tugging the market below a 52-month high hit the previous day, with investors' risk appetite also dampened by declines in U.S. shares.
The Nikkei closed 1.4 percent lower at 11,309.13 after rising to 11,468.28, marking its highest closing level since late September 2008.
Financials were sold-off. Mitsubishi UFJ Financial Group <8306.T> fell 2.4 percent, Sumitomo Mitsui Financial Group <8316.T> shed 2.8%, while Mizuho Financial Group <8411.T> and Nomura Holdings Inc <8604.T> declined 2.0 percent each. They were among the top six most actively traded stocks by turnover on the main board.
Global risk appetite was undermined after minutes from the U.S. Federal Reserve's last meeting suggested the possibility of an earlier-than-expected end to the super-accommodative U.S. monetary easing scheme. Wall Street stocks fell on the minutes, as did metals and gold.
Exporters added to the Nikkei's weak tone, with Panasonic Corp <6752.T> dropping 1.8 percent, Toshiba Corp <6502.T> shedding 1.9 percent and Fanuc Corp <6954.T> falling 2.2 percent.
Construction equipment makers also dropped sharply. Komatsu Ltd <6301.T> shed 4.1 percent, the second-biggest percentage loss leader on the board, and Hitachi Construction Machinery Co Ltd <6305.T> dropped 3.4 percent after Caterpillar Inc's
"It's a correction. Yet small cap stocks maintained a steady tone today, buoyed by retail investors' rotational buying," said Mitsushige Akino, chief fund officer at Ichiyoshi Asset Management.
"This correction phase could last until early March, unless something like the upcoming Abe-Obama summit or BOJ governor nomination moves the forex market," he said.
The Nikkei has gained about 30 percent and the yen has declined some 15 percent against the dollar since mid-November driven by bold fiscal stimulus and monetary easing policies pursued by Prime Minister Shinzo Abe's new government to reignite the economy.
Yutaka Miura, a senior technical analyst at Mizuho Securities, said investors were cautiously awaiting the outcome of a meeting in Washington on Friday at which Abe and U.S. President Barack Obama are expected to discuss a range of issues including economic and trade matters.
For this week, some analysts said the Nikkei is expected to trade in a fairly tight range.
"The Nikkei pierced the psychological resistance level of 11,500, but trading volume has stayed low as investors want to stay on the sidelines before major events," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
The market was likely to remain cautious before the nomination of a new BOJ governor, Miura said.
The government has delayed nominating a governor by a week, fanning talk of friction between the prime minister and the finance minister over who should run the central bank and take aggressive action to revive the economy.
The broader Topix dropped 1.1 percent to 962.86 in thin trade, with 2.72 billion shares changing hands, compared with last week's average daily volume of 4.03 billion shares.
The Mothers index and the Jasdaq index of small to medium-cap stocks and start-up companies gained 2.4 percent and 0.8 percent, respectively.
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A Nikkei newspaper report that Japan's biggest pension fund is considering increasing its exposure to Japanese stocks lent some support to sentiment and contained the broad market's losses, analysts said.
The Government Pension Investment Fund, which oversees more than 100 trillion yen in retirement savings, will consider raising its exposure to domestic stocks in its first portfolio reallocation in years, the Nikkei said.
"This report is suggesting that we will see further stock rises in the future, so the Japanese market probably won't face a significant sell-off even after it rose sharply" said Fujio Ando, an analyst at Chibagin Securities.
(Additional reporting by Ayai Tomisawa; Editing by Shri Navaratnam)