TOKYO Japan's Nikkei average shed 1.2 percent on Friday, retreating from Thursday's three-month closing high as investors locked in gains as expectations for quick stimulus measures from the U.S. Federal Reserve began to dim.
Speaking separately over the past day, St. Louis Fed President James Bullard, regarded as a policy centrist, played down chances of imminent easing to bolster the U.S. economy, while Chicago Fed President Charles Evans, a policy dove, supported taking more action.
Neither official has a vote on the Fed's policy-making committee.
The Nikkei .N225 closed down 107.36 points at 9,070.76, breaking below its five-day moving average at 9,141.74 and its 26-week moving average at 9,146.18. The benchmark was down 1 percent this week, ending a two-week winning run.
A trader at a foreign bank said domestic investors were pocketing profits after the recent run, but that some overseas players were buying on dips.
"What we are seeing on the client side is that they are actually net long. Many (overseas) guys are trying to pick up some machinery names on weakness," the trader said.
Steelmakers .ISTEL.T shed 1.6 percent, tracking overnight weakness in their U.S. counterparts after an analyst downgraded steel producers, saying that prices for the metal will decline.
Nippon Steel Corp (5401.T), JFE Holdings Inc (5411.T) and Nisshin Steel Co 5407.T were down between 1.2 and 3.6 percent.
Other economy-sensitive sectors also came under pressure, with Nissan Motor Co (7201.T), Honda Motor Co (7267.T), TDK Corp (6762.T) and industrial robot maker Fanuc Corp (6954.T) shedding between 1.1 and 3.3 percent.
The broader Topix .TOPX index lost 1 percent to 757.23 in thin trade, with 1.19 billion shares changing hands, the second lowest level this year.
Gains in power companies .IEPNG.T, up 1.5 percent after an upbeat note from Goldman Sachs, offered the market some support.
Goldman said raising power company tariffs could be a "big positive" and that they might be able to reduce or avoid losses even without nuclear restarts.
The brokerage upgraded its ratings on Kansai Electric Power Co Inc (9503.T) and Tohoku Electric Power Co Inc (9506.T) to 'buy' from 'neutral'. The two firms jumped 5.8 and 6.1 percent respectively.
Troubled Sharp Corp (6753.T) rose 5.5 percent after it said the utilization rate at its key Sakai LCD television panel plant had jumped to 80 percent, with sources saying the company has been helped by big orders from Samsung Electronics (005930.KS), U.S. TV maker Vizio and Sony Corp (6758.T).
"Yesterday the Chinese figure was very bad, so U.S. equities went down. But the recent rally was too good for Japan," said Hisao Matsuura, equity strategist at Nomura Securities, adding that it was only natural for the market to consolidate.
Growing expectations that the European Central Bank will soon launch a bond-buying programme to bring down borrowing costs for highly-indebted nations have helped the Nikkei rebound 8.9 percent since it hit a seven-week low on July 25, leaving it up 7.3 percent so far this year.
"September is a bit worrisome because everyone is worried about what kind of message will come from the ECB. But after that no major event is expected," Matsuura said. "Investors will go back to the market and look for value stocks. This kind of action will push up the market."
WEAKER EARNINGS OUTLOOK
The outlook for Japanese companies' earnings remains weak.
According to Thomson Reuters Datastream, Japanese companies' one-month earnings momentum -- analysts' earnings upgrades minus downgrades as a total of estimates -- deteriorated to -9.1 percent from a fall of 4.8 percent last month.
Macquarie Securities lowered its 12-month Topix target by 16.3 percent to 770, a 1.7 percent upside from Friday's close, as it expected weaker earnings growth from Japanese companies.
"The first negative development relates to Japanese industrial production, which has been weak and underperforming expectations so far in 2012," it said in a report.
"The second negative development relates to forward looking indicators, such as the OECD leading indicator. Looking into 2013, spreading excess capacity across the world will lead to weakness in capital expenditure, which is a particular worry for Japan."
(Editing by Simon Cameron-Moore and Joseph Radford)