TOKYO, Feb 22 (Reuters) The Nikkei average fell 0.71 per cent on Wednesday as semiconductor stocks such as Tokyo Electron Ltd.
retreated following falls in their U.S. rivals, and bank shares came under pressure.
After an almost 3 per cent rally on Tuesday, there was little follow-through buying on Wednesday due to a lack of fresh news now that quarterly corporate earnings season is mostly over.
But steel makers such as Nippon Steel Corp. were bought amid easing fears about a fall in product prices, limiting the market's downside.
The Nikkei average ended down 113.16 points at 15,781.78.
The broader TOPIX index was down 0.19 per cent at 1,609.46.
Jun Nishizaki, chief portfolio manager at Nissay Asset Management, said the next focal point for global investors is U.S.
data on consumer prices due later in the day.
''The main scenario now is that U.S. inflation is contained and Japan is about to end years of deflation. Unless there is anything that contradicts this scenario, we'll remain optimistic about Japanese shares,'' he said.
Nishizaki said he expected the Nikkei to run up to new 2006 highs by the end of March on upcoming data underscoring views that Japan is firmly on track for recovery.
The Nikkei hit a five-year closing high of 16,747.76 on Feb.
6. Since then it lost nearly 8 percent to Monday, then jumped almost 3 per cent on Tuesday, its biggest one-day gain in three weeks.
A recent market slump due to fears that foreign investors had started to unwind long positions had pushed down stock prices to attractive levels, and on Tuesday this lured some investors to banks and real estate firms, both of which benefit from reflation.
Orders placed through foreign brokerage firms before the opening on Wednesday showed an intention to buy more shares than they planned to sell for a second straight day.
But even the buying intentions and bullish comments by U.S.
brokerage Goldman Sachs failed to inspire investors.
Goldman's chief strategist Kathy Matsui and others said in a report issued on Tuesday that positive earnings, a strong economic outlook and attractive valuations will likely limit the downside even if foreign investors sell off Japanese stocks in the near future.
FATE OF LIVEDOOR One drag on the market was uncertainty over the fate of Internet firm Livedoor Co., which may face delisting. After the market closed, its former chief executive was arrested again on suspicion of violating securities law, raising the chances that the Tokyo Stock Exchange will delist the shares.
The stock has been a favourite among small investors.
''The worst is behind us,'' said Tsuyoshi Segawa, an equity strategist at Shinko Securities, referring to a heavy sell-off last month prompted by prosecutors' raid on Livedoor.
''But the market has not fully got over the Livedoor issue, given that it will take a while before trading hours are normalised.'' The Tokyo Stock Exchange has shortened afternoon trading for cash stocks by 30 minutes to avoid overloading its computer system. The bourse said on Tuesday it would aim to return to normal trading hours by the end of May.
Chip stocks lost ground after Citigroup on Tuesday lowered its weighting on the semiconductor sector and semiconductor equipment industry group to ''market weight'' from ''overweight''.
Tokyo Electron, the world's second-biggest chip equipment maker, fell 2.7 per cent to 7,870 yen and Advantest Corp., the No.
1 maker of microchip testing equipment, fell 4.5 per cent to 12,740 yen.
Banks came under pressure as dealers grabbed short-term profits, with Resona Holdings Inc., Japan's fourth-biggest banking group, falling 3.5 per cent to 382,000 yen after adding 6.2 per cent on Tuesday.
In contrast, Nippon Steel, the world's third-biggest steel maker, was up 1.2 per cent at 432 yen and smaller rival Sumitomo Metal Industries Ltd. gained 2.1 per cent to 482 yen.
Their gains came after official newspaper Shanghai Securities News said on Wednesday that China's top steelmaker, Baoshan Iron&Steel Co. Ltd., plans to raise steel prices by about 10 per cent in the second quarter.
Komatsu Ltd. gained 4.9 per cent to 1,967 yen after Daiwa Securities said in a report on Wednesday that demand for construction and mining equipment remains strong and demand in China is recovering.
Trade activity rose to its highest level in a week, with 2.27 billion shares changing hands on the Tokyo exchange's first section. Advancers edged past decliners 863 to 730.
REUTERS SD RK1445