Japanese stocks fell on Wednesday morning as automakers were hit by a sharp drop in US new car sales last month, while other stocks, including financials, retreated after a rally over recent weeks.

The Nikkei share average declined 0.5 per cent to 24,141.50 in midmorning trade, though it was still holding at 27-year highs. The weak yen trend paused as the Japanese currency attracted safety bids amid concerns over Italy's budget plan.

“Japanese shares are sensitive to global investors' sentiment. Cyclical shares that rose over the past few weeks are prone to profit-taking,” said Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management.

The auto sector was the worst performer on the board, falling 2.0 per cent followed by insurers and banks which shed 1 per cent and 0.9 per cent, respectively.

Major automakers had on Tuesday posted a hefty drop in US new vehicle sales for September, in part due to a decline in sales in areas hit by Hurricane Florence and a tough comparison to the year-ago period when consumers rushed to replace vehicles damaged by Hurricane Harvey.

Sales in September 2017 were boosted by major replacement demand for water-damaged vehicles following Hurricane Harvey, which had flooded parts of southeastern Texas in August that year.

Toyota Motor Corp declined 2.2 per cent, Honda Motor Co tumbled 3 per cent and Nissan Motor Co shed 1.6 per cent. Financial stocks lost ground, with Dai-ichi Life Holdings sliding 2.0 per cent and Sumitomo Mitsui Financial Group falling 1.4 per cent.

Suruga Bank was volatile after sources told Reuters that Japan's financial regulator will order the bank to halt some operations in the wake of improper lending on property investments.

The stock jumped as much as 16 per cent after slipping into the red in early trade, with traders saying that retail investors were seen covering their short positions after pricing in the bad news. The broader Topix fell 0.2 per cent to 1,819.64.

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