The Nikkei stock average ended a volatile session slightly lower on Wednesday, pressured by a strong yen and concerns about earnings, as well as uncertainty ahead of a meeting of European leaders later in the day.
European Union and euro zone leaders will meet to discuss measures on the region's debt crisis, including bank recapitalisation and leveraging a regional rescue fund, and some investors fear the gathering will fail to make much progress on a comprehensive plan.
Tokyo investors continued to watch foreign exchange markets after the dollar dipped to a fresh record low against the yen at 75.73 yen on Tuesday.
Investors will be watching what happens in Europe tonight to set the tone for the rest of the week, as well as the yen, plus any surprises from results now that earnings season has begun in Japan, said Toshiyuki Kanayama, market analyst at Monex Inc.
The Nikkei average finished down 0.2 percent at 8,748.47, while the broader Topix lost 0.2 percent to 746.48.
The Nikkei fell as much as 1.4 percent in intraday trade to 8,642.56, but managed to bounce back after briefly breaching support at its 25-day moving average, now at 8,669.
Trading volume was relatively thin but in line with recent averages, with 1.46 billion shares changing hands on the main board, compared with Tuesday's 1.44 billion shares. Decliners led advancers 884 to 587.
In light of the yen's appreciation and lingering doubts about a solution to Europe's debt problems, the Bank of Japan will likely debate easing monetary policy further on Thursday, probably focusing on an expansion of its asset-buying programme, sources familiar with the bank's thinking have said.
While the stock market would likely show a muted reaction to any easing announcement, expectations that the central bank will step into the market to buy exchange-traded funds as part of its asset-buying programme are lending some support, market participants said.
Investors also bought back shares of companies that recently fell on earnings news, on the perception that bad news may be factored into the shares, said Takashi Ushio, head of the investment strategy division at Marusan Securities Co.
Such shares included Canon Inc , which erased its morning losses, and industrial robot maker Fanuc Ltd , which slid 3 percent on Tuesday, he said.
Fanuc rose 2.9 percent to 12,510 yen. Canon, which earlier fell as much as 2 percent, recovered to rise 0.6 percent to 3,510 yen. The company cut its annual outlook on Tuesday due to the impact of the Thai floods and a strong yen.
Nidec Corp added 6.3 percent to 6,540 yen, after the maker of precision motors said on Tuesday that it would maintain its annual operating profit forecast for the year to March at 90 billion yen despite the damage from floods in Thailand. Market players had expected greater damage from the flooding.
TDK Corp , another company that had been pressured by concern about the impact of the Thai floods, surged 8.4 percent to 3,310 yen.
Scandal-plagued Olympus Corp shed 7.6 percent to 1,099 yen, wiping out most of its 8.2 percent gain on Tuesday.
Olympus shares fell for seven straight sessions through Tuesday, losing more than half their value, after the company fired its chief executive, who has questioned hefty fees paid to financial advisers in past M&A deals. The company announced after the market close that its chairman and president would step down over the scandal.
On Wednesday, a senior Japanese lawmaker demanded a probe of outlandish advisory payments and its ousted chief executive said he was in contact with the U.S. Federal Bureau of Investigation, piling pressure on the embattled company.
Japan Securities Finance, a stock lending brokerage, on Tuesday put Olympus on a list of shares for which caution is advised on margin trading due to a surge in such trading, while the Tokyo Stock Exchange also started to announce margin trading positions on a daily basis instead of weekly as a heads-up to market players.
Hitachi Ltd rose 3.7 percent to 424 yen and was the third-heaviest traded issue by turnover, after the company lifted its operating profit estimate for the first half by 70 percent due to improvements in its infrastructure-related businesses.
But it maintained its annual profit outlook, citing uncertainty in the global economy, the impact of floods in Thailand and the strong yen.