The Nikkei found support near the bottom of a narrow 200-point range in which it hovered last week, helped by ex-dividend date buying and bargain-hunting by foreigners and short-term investors.
Domestic players kept off-loading holdings in Tokyo stocks or have already closed positions ahead of the end of the fiscal year on March 31, putting the market under more selling pressure.
Japanese shares have lost 8 percent since the earthquake, tsunami and threat of a nuclear disaster triggered the biggest two-day rout on the market since 1987. In comparison, MSCI's index of Asian shares outside Japan <.MIAPJ0000PUS> has fallen 2.5 percent since the quake.
There's still room to rise as foreign buying on dips is likely to continue, although trading may be directionless before the end of the fiscal year, said Hajime Nakajima, a wholesale trader at Cosmo Securities.
By midafternoon the benchmark Nikkei <.N225> had lost 1.1 percent or 108.79 points to 9,427.34. The broader Topix <.TOPX> shed 0.5 percent to 852.74.
Underscoring worries that Japan is in for a long fight to contain the radiation threat from the stricken Fukushima nuclear plant on its northeast coast, readings on Sunday showed contamination 100,000 times normal in water at the plant's reactor No. 2 and 1,850 times normal in seawater nearby.
Although investors are alert to news flows related to changes in companies' full-year forecasts and dividend payouts, the fundamental mood should not be that bad thanks to foreign buying, said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets.
Before the market opened on Monday, foreigners were seen placing orders to buy a net 14.9 million shares, the ninth consecutive day of pre-market block buying.
Overseas investors bought a net 891 billion yen ($11 billion) of Japanese stocks in the week following the quake, the highest since records began in 2005.
Tokyo Gas <9531.T> gained 3.9 percent to 378 yen after the company hiked its net profit forecast for this business year to 98 billion yen from 71 billion yen on a jump in demand from factories in January and February and an increase in gas use by households due to a cold winter.
'MARKETS HATE UNCERTAINTY'
Worries over disrupted supply chains of automakers and DRAM chipmakers further soured the mood, with Deutsche Securities slashing its forecasts for major Japanese carmakers assuming a prolonged production suspension after the quake.
Automakers have unperformed the fall in the Nikkei in the two weeks following the quake, with Toyota Motor Corp <7203.T> down 10 percent and Honda Motor <7267.T> 11 percent lower.
Markets hate uncertainty. Two weeks on, most assembly factories remain shut, and it's become increasingly apparent that the industry will take a long but as yet undefined period to get back on its feet due to supply chain disruption, Clive Wiggins, an analyst at Macquarie Securities, said in a note to clients.
This open-endedness has fueled fears for the worst, resulting in valuation compression.
Bucking the market's negative mood, JFE Holdings Inc <5411.T> climbed 1.3 percent to 2,393 yen after the Nikkei business daily reported that its unit JFE Steel Corp will boost output of materials for temporary housing by about 70 percent by extending operating hours at a Kobe facility that makes lightweight steel H-beams.
(Reporting by Ayai Tomisawa; Editing by Michael Watson)