TOKYO Japan's Nikkei share average fell for a third straight day to four-week low on Thursday, hurt by renewed concerns about Europe's funding difficulties after a weak Spanish debt auction and by fading hopes for additional stimulus from the U.S. Federal Reserve.
But the Nikkei is still up more than 15 percent this year, supported by liquidity boosting programs from central banks and a run of strong U.S. economic data, and strategists said that while the market was now decidedly more cautious, they do not expect a bear market relapse.
"We remain positive mid-term, and don't anticipate a full-scale flare-up of the Greek crisis, another natural disaster in Japan or a hard landing in China," Naomi Fink, Japan equity strategist at Jefferies, said in a report.
Fink and others said the market direction in Tokyo would, to a large extent, be determined by signals from the Bank of Japan.
It meets next week and is expected to maintain its easy monetary stance after setting an inflation goal and announcing hefty increases in bond buying in February which spurred an equities rally and weakened the yen by more than 5 percent.
"An outsider's perspective on Japan for the last 15 years is that it has looked like a value trap...What we're trying to think hard about is the latest changes in the BOJ and whether this is really going to be a game changer," said Andrew Pease, chief investment strategist of Asia Pacific at Russell Investments.
The benchmark Nikkei .N225 ended down 0.5 percent or 52.38 points at 9,767.61, after sliding more than 2 percent on Wednesday.
The broader Topix index ended down 0.3 percent at 832.57, paring earlier losses after traders said the Bank of Japan likely supported the market by buying exchange-traded funds in afternoon trade.
Spanish borrowing costs jumped at a bond auction on Wednesday, raising fears that the euro zone debt crisis may flare up again and suggesting that the effects of a liquidity injection that has bolstered risk assets so far this year may be waning.
Automakers and financials were among the most actively traded stocks with Toyota Motor Corp (7203.T) down 0.7 percent, Honda Motor Co (7267.T) losing 1.1 percent, and insurer Tokio Marine Holdings Inc (8766.T) off 1.3 percent.
Trading volume ticked up, with 2.2 billion shares changing hands on the main board, up from 2.1 billion shares on Wednesday.
Spanish economic overview: link.reuters.com/quf25s
Asset performance in 2012: link.reuters.com/muc46s
Lower valuations for Tokyo equities have also supported the market so far but some said that was no longer the case.
"Now there's not a lot of valuation headroom globally and you have to be a little cautious with reality coming into the frame on Europe," said Pease.
In terms of valuations, the Topix .TOPX carried a 12-month forward price-to-earnings ratio of 13.73, compared to 12.97 for U.S. S&P 500 .SPX and 10.77 for STOXX Europe 600.
A trader said investors can buy short-dated Nikkei call spreads expiring in April or May as a cheap way to capture any upside ahead of the central bank meeting.
Kansai Electric Power Co Inc (9503.T) outperformed the broader market, up 3.2 percent after a report that Japan's trade minister is set to seek local approval for the restart of the utility's Ohi nuclear plant as early as Sunday.
Falling in heavy volume, Point Inc (2685.T) shed 2.9 percent to 2,924 yen after the casual clothing shop firm reported a 19.4 percent drop in annual operating profit.
The disappointing results prompted Nomura to cut its earnings forecast for the current fiscal year and its price target to 3,300 yen from 3,900 yen.
(Additional reporting by Dominic Lau and Sophie Knight; Editing by Edwina Gibbs)