Japan's Nikkei average edged lower on Thursday, slipping from a two-month high hit the previous day, as recent gainers including Canon and real estate shares such as Mitsui Fudosan retreated.
Market players said Tokyo shares are likely to be supported by improving corporate earnings, and that with the Nikkei having popped above resistance near 10,808 the previous day, the next upside target is the mid-January high of 10,982.10.
A rise above that level would take the Nikkei to its highest in more than 17 months.
But with technical signals suggesting the market's recent rally may have been too fast, the Nikkei may be poised for a further pull-back phase in the near term, or could at least get stuck in a range for a while, said Masayoshi Okamoto, head of dealing at Jujiya Securities.
Based on technical factors, there is a strong sense that the market is overheating, he said.
The up-down ratio, which compares the number of shares that have risen against those that have fallen over a 25-day period, is now in over-bought territory, he said.
The question is how things will cool down. One possibility is a time period adjustment, with the Nikkei hovering around say 10,600 or so for a while and trading sideways, he continued.
The other possibility is a rapid pull-back to below 10,500, Okamoto said.
But with domestic market players reluctant to push share prices sharply lower with the end of Japan's financial year looming at the end of the month, the Nikkei will probably rebound even if it were to fall below 10,500, Okamoto said.
The Nikkei eased 0.1 percent to 10,836.60, edging back from a two-month intraday high of 10,864.30 struck on Wednesday.
The broader Topix index rose 0.1 percent to 947.98.
Improving economic fundamentals are supporting Tokyo shares, as underscored by the Reuters Tankan, which showed that Japanese companies have become far less gloomy about economic conditions than three months ago.
The Nikkei climbed 1.2 percent on Wednesday after the Bank of Japan eased policy in a move seen by many market players as an attempt to prevent the yen from rising.
The BOJ left interest rates unchanged at 0.1 percent but decided to double the size of a fixed-rate lending operation it put in place at an emergency meeting in December.
The Nikkei's rise also gained momentum on Wednesday after it broke above 10,808.73, the settlement price of Nikkei futures and options contracts expiring in March, some players said.
Property shares retreated after Morgan Stanley lowered its view on the sector to cautious from in-line. The brokerage also cut its ratings on Mitsui Fudosan and Mitsubishi Estate to underweight from equal-weight, saying in a client note that it believes property stock prices have not discounted potential major risks.
Mitsui Fudosan fell 2.2 percent to 1,615 yen and Mitsubishi Estate shed 2.4 percent to 1,498 yen.
Digitial camera and office equipment maker Canon fell 1.7 percent to 4,070 yen.
Shares of Toho Zinc, a nonferrous custom smelter specializing in zinc and lead, climbed 5.1 percent to 455 yen after it raised its operating profit forecast for the financial year that ends this month to 7.5 billion yen ($83.1 million), up from its previous forecast for a 6 billion yen profit.
(Reporting by Masayuki Kitano; Editing by Joseph Radford)