Nikkei falls 0.4 percent on North Korea, futures selling

TOKYO (Reuters) - Japan's Nikkei average fell 0.4 percent on Tuesday, hurt after North Korea warned of further short-range missile tests and by selling in the futures market after it failed to make a sustained break above a key level the previous day.

Market participants said tech shares such as TDK Corp (6762.T) succumbed to profit-taking amid thin trade, with a number of investors waiting to see how Wall Street will reopen after the U.S. Memorial Day holiday.

But Toyota Motor Corp (7203.T) gained ground after a brokerage lifted its rating, saying the world's biggest automaker would benefit from growing profits for its hybrid vehicles.

Some analysts said the Nikkei retreated after a failed attempt on Monday to make a sustained break above 9,400, about the same as its 200-day moving average.

"The market lacked decisive incentives as Wall Street was closed on Monday. In addition to the North Korea missile news, selling of futures by CTAs led the market lower," said Kazuki Miyazawa, a market analyst at Daiwa Securities SMBC.

"They sold stock futures and bought bond futures after doing the opposite the previous day."

Commodity trading advisers, or CTAs, are trend-following funds that use programs to trade financial markets.

The benchmark Nikkei .N225 fell 36.19 points to 9,310.81 and at one stage dropped as low as 9,231.93. On Monday, it closed up 1.3 percent, after rising briefly to 9,402.76.

The broader Topix rose 0.1 percent to 883.77 .

On Tuesday, Yonhap news agency quoted a South Korean official as saying that North Korea is ready to fire another short-range missile either on Tuesday or Wednesday, a day after testing a nuclear device and firing three short-range missiles.

Although the Nikkei mostly shrugged off North Korea's actions on Monday, the warning of missile tests was enough to encourage investors to take profits.

"This isn't necessarily going to have much of an impact -- after all, the market shrugged off the nuclear test yesterday -- but it's also not particularly encouraging either," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

After the market close, South Korea's Yonhap news agency said North Korea fired two short-range missiles off its east coast.

Investors were also waiting for cues from this week's U.S. economic indicators and the fate of struggling carmaker General Motors GM.N.

GM faces a June 1 deadline to work out issues with its creditors if it wants to avoid a bankruptcy filing.

High-tech shares slipped, largely on profit-taking, with Tokyo Electron (8035.T) down 3.2 percent at 4,230 yen and TDK losing 2.6 percent to 4,170 yen. Industrial robot maker Fanuc (6954.T) fell 1.7 percent to 7,410 yen.

Toyota Motor Corp (7203.T) edged up 1.1 percent to 3,600 yen after Merrill Lynch lifted its rating to "buy" from "underperform."

Telecommunications firms were also in favor, with KDDI Corp (9433.T) rising 2.5 percent to 497,000 yen, becoming the biggest contributor to the Nikkei 225 by volume weight.

Pharmaceutical firm Daiichi Sankyo (4568.T) rose 2.5 percent to 1,792 yen.

Seiko Epson Corp (6724.T) gained 1.9 percent to 1,314 yen after the company said it has developed technology that enables the low-cost production of organic light-emitting diode (OLED) display panels.

Japanese retail investor sentiment on domestic stocks improved for a second straight month in May to its highest level in nearly two years, a Reuters survey showed.

The government raised its assessment of Japan's economy for the first time in three years on Monday, saying the pace of worsening is slowing as exports and industrial output are nearing bottom, a week after the Bank of Japan did the same.

Trade was slightly lighter on the Tokyo exchange's first section, with 1.93 billion shares changing hands compared with last week's daily average of 2.1 billion.

Advancing shares outnumbered declining ones by nearly 2 to 1.

(Additional reporting by Elaine Lies; Editing by Michael Watson)