Japan's Nikkei average fell from a three-month high on Thursday after China's inflation rate accelerated faster than market expectations and uncertainty remained over Greek bailout talks, though it still held above the 9,000 mark.
The benchmark pared losses in the afternoon, with a trader at a U.S. bank citing hedge funds picking up blue chip stocks.
The Nikkei .N225 closed 0.2 percent lower at 9,002.24, moving further away from its 200-day moving average near 9,060, after rallying 1.1 percent the previous session.
Global equities have performed very well since the beginning of this year. Technically this is a bit of a worrying sign. In the near-term, there may be a bit of a pullback. But I don't think this correction will be so huge, said Seiichiro Iwasawa, chief strategist at Nomura.
There are so much money sidelined, he said, adding that investors are likely to put their money to put their work , which would support the market.
Despite a disappointing earnings season for many Japan firms, market players point to more signs of foreign investors coming back to Japanese shares amid increased liquidity for global financial markets after the Federal Reserve pledged to keep interest rates near zero until at least 2014.
An injection of 489 billion euros ($648.12 billion) of three-year loans by the European Central Bank in December also boosted liquidity.
Data from Japan's finance ministry showed foreign investors last week continued their net buying of Japanese equities for a sixth straight week, buying a net 64.3 billion yen ($836.21 million) after net purchases of 38.7 billion yen.
The benchmark Nikkei is up 6.5 percent this year after shedding 17.3 percent in 2011.
Illustrating the underlying upbeat sentiment, the Nikkei volatility index .JNIV eased 0.3 percent on Thursday. The lower the volatility index, the higher the risk appetite.
The broader Topix .TOPX also added 0.2 percent to 784.49.
Nissan Motor Co (7201.T), however, dropped 1 percent after earnings on profit-taking but is still up 10.7 percent this year after shedding 10.5 percent last year.
It's just profit-taking. The stock has run quite nicely. We still think that foreigners are just slowly starting to come back to Japan, a trader at a foreign brokerage said.
The automaker posted a 3.6 percent rise in quarterly operating profit on the back of strong global sales and its full-year forecasts are among the highest projected within the domestic auto industry.
China's annual inflation rate accelerated to 4.5 percent in January, breaking a five-month trend of easing price pressures as consumers ramped up spending during the Chinese Lunar New year holiday season.
It was a surprising number. You could take it as a sign of an improving economic environment in China or as a factor that lowers expectations of monetary easing and clearly, the market is seeing it as the latter, said Yoshihiko Tabei, general manager of capital markets research at Kazaka Securities.
Trading volume on the main board hit a six-month high, with 2.67 billion shares changing hands.
MACHINERY STOCKS FALL
Japanese corporate earnings continued to be downbeat.
Daikin Industries Ltd (6367.T), Japan's largest manufacturer of commercial-use air conditioners, shed 2.1 percent after cutting its annual net profit forecast by 21.7 percent to 36 billion yen, citing unfavorable weather in Australia and Thailand as well as strength in the yen.
Out of the 135 Nikkei companies that have reported quarterly figures, two-thirds of them have missed market expectations, Thomson Reuters StarMine data showed. This compares to 34 percent for S&P 500 .SPX companies.
The machinery subindex .IMCHN.T fell 0.7 percent after core machinery orders fell 7.1 percent in December from the previous month as worries over slowing global growth may hurt capital spending.
Construction machinery maker Komatsu Ltd (6301.T) lost 0.7 percent and Hitachi Construction Machinery Co Ltd (6305.T) dropped 1.4 percent.