TOKYO Japan's Nikkei average fell for the third session on Wednesday as fears that Greece may not meet its bond swap deadline sapped risk appetite, while Brazil's weaker annual growth added to fears of a slowdown in the global economy.
Investors offloaded Tokyo's exporters, taking profit in blue chips that had stellar performances in February and shifting their attention to domestic-focused companies.
Among exporters, Toyota Motor Corp (7203.T) fell 1.2 percent, while Sony Corp (6758.T) shed 2.4 percent and machinery maker Komatsu Ltd (6301.T) lost 1.2 percent.
Shippers also fell, with Mitsui O.S.K. Lines (9104.T), Nippon Yusen KK (9101.T), Kawasaki Kisen Kaisha Ltd (9107.T) down between 0.4 and 2.3 percent.
The benchmark Nikkei .N225 eased 0.6 percent to a two-week closing low of 9,576.06.
Bridge builders outperformed the market and extended this week's rally after the Metropolitan Expressway Co Ltd convened its first panel meeting this week to consider upgrading highways in Tokyo.
Japan Bridge Corp (5912.T) jumped 3.9 percent, P.S. Mitsubishi Construction (1871.T) gained 6.5 percent and railway and road construction contractor Tekken Corp (1815.T) soared 16.1 percent.
"This is the market correction that we've been waiting for. Investors are picking up small cap stocks like bridge builders but apart from that it's a difficult environment for domestic investors to reach their hands out to buy," said Masayuki Otani, chief analyst at Securities Japan.
"For now, I see support at Nikkei's 25-day moving average near 9,300. Domestic investors who failed to get on the rally are not going to jump in now and foreign investors' risk appetite also seems to have waned if you look at VIX .VIX."
Wall Street's fear gauge climbed 16 percent on Tuesday to post its biggest one-day percentage rise in four months.
Market players said the long-anticipated correction was likely to last the week as investors delay buying ahead of the crucial U.S. jobs number and a major settlement of options and futures in Tokyo on Friday.
Concerns that Greece may be unable to secure private creditors' support for its debt restructuring, which is a key part of a bailout program, also hurt sentiment. Greek private creditors have until Thursday to say if they will participate in the exchange.
"Market participants are worried about the Greek debt swap, but that's not the only factor. We have patchy economic data out of the United States, rising oil prices that could easily derail a global recovery...it's only natural that defensives are being bought today," said Yutaka Miura, senior technical analyst at Mizuho Securities.
The broader Topix .TOPX lost 0.6 percent to 822.71.
Trading volume dipped, with 2.25 billion shares changing hands, down from 2.5 billion shares on Tuesday.
Japan's securities subindex .ISECU.T was one of the worst sectoral performers, down 1.8 percent, with Nomura Holdings (8604.T), Japan's top investment bank, dropping 1.9 percent and Daiwa Securities Group Inc (8601.T) losing 2.4 percent.
Banking groups Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitsui Financial Group (8316.T) eased 1 percent and 0.7 percent, respectively.
Mizuho Financial Group (8411.T) fell 1.5 percent.
"What we are seeing is a roll over in terms of the beta rally. It is now about stock selection as opposed to just buy on the beta," another trader said.
"We still think that the U.S. is recovering and to that, cyclical stocks here do provide good value. Although in the near term, there will be a pullback, fundamentally the market outlook is starting to improve."
The Nikkei rallied more than 10 percent and marked its best February performance in decades last month, supported by accommodative policies by global central banks, including Bank of Japan's easing move that weakened the yen.
But the initial euphoria over ample liquidity faded as market participants scouted for fresh reasons to buy risk assets.
Reflecting investors' risk aversion, the Nikkei volatility index .JNIV was last up 5.1 percent on Wednesday. The higher the volatility index, the lower the risk appetite.
The stronger yen also weighed on sentiment, with the dollar last trading at 80.79 yen, stepping back from a nine-month peak of 81.86 set on Monday, while the euro pulled further away from a recent high near 110.00 yen to 106.21.
Brazil's economy grew just 2.7 percent in 2011 compared with 7.5 percent in 2010 and the Australian economy grew a disappointingly sluggish 0.4 percent last quarter, adding to worries after China cut its growth outlook earlier in the week.
(Additional reporting by Dominic Lau; Editing by Jacqueline Wong)