Japan's Nikkei share average fell 0.7 percent on Thursday with shipping firm Nippon Yusen falling on dilution worries related to its capital-raising plan, while Honda and other carmakers rose after a positive brokerage report.
FamilyMart Co, Japan's third-largest convenience store operator, rose 1.6 percent after a source familiar with the matter said the company was in talks to buy smaller rival am/pm Japan Co.
The Nikkei had edged higher earlier in the day, buoyed by gains on Wall Street on the view that the global economic recovery is looking a little more certain, but later trimmed those gains to turn negative.
The Nikkei's decline in the afternoon was driven by flows in Nikkei futures, said Hideki Horikawa, a senior adviser at Himawari Securities Inc's investment advisory division.
"CTAs seem to have been selling stock futures while buying Japanese government bond futures today," Horikawa said.
"That is the biggest reason why the market weakened toward the end," he said.
Trading volume in Nikkei futures rose to 77,351, the highest since late October.
The benchmark Nikkei average fell 0.7 percent or 67.19 points to 9,804.49, edging back towards the bottom of its range over the past month of 9,628.67 hit in early October.
If the Nikkei breaks below that early October low it risks falling close to 9,000, said Horikawa at Himawari Securities.
The broader Topix index fell 0.5 percent to 867.70.
The Nikkei has recently been hit by falling trading volume, with the market lacking the energy to punch above resistance at 10,000 — just about where the Nikkei's 25-day moving average comes in — without fresh trading factors.
The Nikkei is up about 40 percent from a trough hit in March, but has fallen roughly 9 percent from its late-August peak of 10,767.00.
While investor risk tolerance seems healthy around the world, Tokyo shares have failed to capitalise on that, possibly due to factors such as policy uncertainty including concerns about the government's fiscal policy, said Nagayuki Yamagishi, an investment strategist at Mitsubishi UFJ Securities.
"Investors seem to be bypassing Japanese shares," Yamagishi said, adding that moves in Japanese shares were now dominated by investors trading based on factors specific to individual shares.
Carmakers rose after Goldman Sachs raised ratings on Fuji Heavy Industries, maker of Subaru cars, to "buy" from "neutral" and added Honda Motor Co, already rated "buy", to its Conviction List.
Analyst Kota Yuzawa cited larger-than-expected guidance hikes with first-half results based on cost cuts and improved production volume.
Fuji Heavy Industries climbed 4.4 percent to 357 yen and Honda Motor rose 1.8 percent to 2,905 yen.
Shipping companies extended their losses after Nippon Yusen said it would raise up to 142.5 billion yen ($1.6 billion) through a public share offering of 427 million new shares.
Market analysts said the announcement raised fears that other shipping firms would have to do the same.
Nippon Yusen fell 4 percent to 314 yen and fellow shipper Kawasaki Kisen K.K. lost 6.1 percent to 310 yen.
Trade was moderate, with 1.8 billion shares changing hands on the Tokyo exchange's first section, roughly equal to last week's daily average of 1.82 billion.
Declining shares outnumbered advancing ones by nearly 5 to 1.
