Japan's Nikkei average dipped 0.2 percent in choppy trade on Wednesday, weighed down by investor caution after disappointing U.S. housing data, but blue-chip stocks such as Canon Inc <7751.T> and carmakers jumped after brokerage upgrades.
Sanyo Electric Co <6764.T> soared as much as 17 percent to a near two-month high, after a source familiar with the matter said Toyota Motor Corp <7203.T> would buy batteries for hybrid cars from Sanyo to keep pace with growing demand for cleaner vehicles.
Investors are picking up individual stocks with specific news, but their basic stance is still index-trading mainly in stock futures, said Yutaka Miura, senior technical analyst at Mizuho Securities.
Investors buy on dips but they don't want to aggressively keep buying due to concerns that economic indicators won't be all positive going forward as data so far has been mixed.
In moderate trade, the benchmark Nikkei <.N225> fell 24.46 points to 10,260.50, while the broader Topix <.TOPX> was flat at 949.32.
The S&P 500 Index <.SPX> rose 1 percent on Tuesday, boosted by better-than-expected results from Home Depot Inc and Target Corp , which were largely due to cost-cutting and tight controls over inventory, offsetting an unexpected drop in housing starts.
U.S. government data showed construction starts for single-family dwellings, the worst-hit part of the housing market, rose 1.7 percent last month from June to an annual rate of 490,000 units -- the highest since October.
But a 13.3 percent drop in new multifamily home projects pushed overall housing starts down 1 percent to an annual rate of 581,000 units after two months of gains.
Market players said investors were also hesitant to take big positions ahead of Japan's national election on August 30.
Unless the market sees convincing plans for reforms and economic measures from the political side, it may not be able to avoid selling pressure by overseas investors, said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
Japan's opposition Democratic Party leads Prime Minister Taro Aso's Liberal Democratic Party in newspaper polls ahead of the election.
AUTOMAKERS STRONG, SANYO SOARS
As automakers and other exporters gained, shares of companies that rely on domestic demand fell, though market players said trade was still dominated by index-trading.
Fast Retailing Co <9983.T>, an operator of casual clothing store chain Uniqlo, shed 2.5 percent to 10,580 yen to become the top drag on the Nikkei 225. Mobile phone carrier Softbank Corp <9984.T> fell 1.5 percent to 2,000 yen.
Canon climbed 3 percent to 3,460 yen after Goldman Sachs upgraded the company to buy from neutral and added it to its conviction list, citing expectations for a strong rebound in laser beam printer shipments and resilient demand for digital cameras.
Toyota and other automakers also gained after Nomura Securities raised its investment stance on the sector to bullish from neutral.
Nomura cited improvement in company performance in the first quarter, hopes for recovery in demand due to government support measures, and a growing possibility that companies may raise their forecasts.
Toyota climbed 1.7 percent to 4,110 yen, Honda Motor Co <7267.T> jumped 3 percent to 3,100 yen and Mazda Motor Co <7261.T> gained 2.7 percent to 264 yen. Nissan Motor <7201.T> advanced 1.6 percent to 712 yen.
The transport subindex <.ITEQP.T> gained 1.6 percent to become the biggest gainer among the subindexes.
Sanyo shares were up 14.3 percent at 256 yen, after hitting their highest since June 29.
Toyota, the world's biggest automaker, will first use Sanyo's lithium-ion batteries from around 2011, said the source, who spoke on condition of anonymity because the information is not yet public.
Some 998 million shares changed hands on the Tokyo exchange's first section, compared with last week's morning average of 932 million.
Declining shares outnumbered advancing ones, 899 to 590.
(Reporting by Aiko Hayashi; Editing by Joseph Radford)