TOKYO (Reuters) - Japan's Nikkei share average fell for a third straight session on Friday as investors pocketed gains from the strongest first quarter rally in 24 years, while the market waited on key global events next week for direction.
Despite the dip, the Nikkei .N225 ended the quarter up 19.3 percent - its best quarterly performance since the second quarter of 2009 - as robust U.S. economic data and accommodative central bank policies helped drive a global equities rally.
Market players said the benchmark had entered a much-needed correction after its surge and was likely to consolidate around current levels ahead of key economic data and events next week.
The Nikkei closed down 0.3 percent at 10,083.56, moving further from a one-year closing high of 10,255.15 on Tuesday.
"I took some profits on some financial stocks, such as the megabanks and securities firms this month. I am just waiting for the weakness to buy again and the new earnings guidance from companies for the fiscal year 2012/13," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
Megabanks Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitsui Financial Group (8316.T) fell more than 1.8 percent. But they are still up at least 26 percent this year.
"I am gradually increasing the positions on small and mid-caps," Sakuma said.
The broader Topix index .TOPX was down 0.4 percent to 854.35.
Fanuc Corp (6954.T) was the third-most heavily traded stock, down 2.9 percent after UBS downgraded the industrial robot maker to "sell" from "neutral", citing the risk of a slowdown in global manufacturing purchasing managers' indexes.
Trading volume on the main board fell, with 1.89 billion shares changing hands, down from 2 billion on Thursday.
"European Union discussions on the scale of the ESM (European Stability Mechanism), the Spanish government's 2012 budget plan and the China PMI figure ... ahead of this, as well as all the U.S. data, the market is cautious," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
"But overall sentiment remains strong and it doesn't look like the Nikkei will break below 10,000," he said.
Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities, said the market had been overheated on optimism over the U.S. economic recovery and the market's main focus will be whether factory activity and consumer sentiment data bolster the bullish outlook or undermine the recent rally.
"I do think there is a strong possibility that the U.S. data released next week will spur a market correction," he said.
The benchmark's 14-day relative strength index was at 62.2, below the 70 threshold that signals that it is "overbought", after remaining in overheated territory for most of March.
Asset performance in 2012: link.reuters.com/muc46s
Exporters fell on the firmer yen, with the dollar at 81.937 yen after falling to a three-week low of 81.83 yen.
Honda Motor Co Ltd (7267.T) dropped 0.9 percent, Canon Inc (7751.T) lost 1 percent and Sony Corp (6758.T) fell 2.4 percent.
Naomi Fink, Japan equity strategist at Jefferies Japan, said the yen's recent steadying was "healthy" and said investors shouldn't sell Japan.
"As market momentum slows we shift focus to relative value among cyclicals -- we reiterate positives for electrical parts and components over chemicals, given the former has shown clearer signals of inventory clearance," Fink said in a report.
Japan's precision machinery subindex .IPRCS.T was flat and electrical machinery sector .IELEC.T eased 0.8 percent.
Reflecting the optimistic mood, the Nikkei volatility index .JNIV slipped 1.5 percent. The lower the volatility index, the higher the risk appetite.
Citigroup said Japan's defensive stocks offered the best shelter for global equity investors in a "risk-off" environment.
"Japanese health care, telecoms and utilities are all in the five least risky major sectors globally," it said in a note. "Japanese health care has outperformed during every risk-off phase and underperformed during each risk-on phase since 2001."
"The low risk of Japanese sectors is of course supported by the yen ... the yen tends to appreciate during risk-offs while it usually depreciates during risk-ons."