Japan's Nikkei share average dropped on Tuesday morning, snapping a six-day winning streak after a stronger yen triggered profit taking, while banking stocks underperformed on fears of counterparty risks following a drop in European banks.

The Nikkei dropped 1.0 per cent to 15,620.11 in midmorning trade after gaining 5.5 per cent in the course of its six day rally.

Sentiment toward stocks is weak after the dollar fell 0.3 per cent to 102.32 yen.

“Although fears about the dollar going below 100 yen again have receded, there is still an impact on Japanese manufacturers' earnings under the current currency levels,” said Kazuhiro Takahashi, equity analyst at Daiwa Securities.

He added that investors probably won't take large positions before the release of US jobs data this Friday.

As markets fret over the health of European banks and counterparty risks, Japanese banking stocks underperformed, falling 1.6 per cent.

European banks, saddled with bad loans, dragged European shares lower overnight, after Italian Prime Minister Matteo Renzi's spokesman said the country had no plans to defy EU rules by pumping public money into its banks.

Mitsubishi UFJ Financial Group fell 1.7 per cent and Sumitomo Mitsui Financial Group declined 2.0 per cent.

Exporters lost ground with Toyota Motor Corp dropping 0.4 per cent, Honda Motor Co shedding 1.2 per cent and Panasonic Corp declining 0.7 per cent.

On the other hand, Japan Display Inc soared after a regulatory filing showed that Singapore-based fund Effissimo, established by former colleagues of Japan's most famous activist investor, Yoshiaki Murakami, bought 5.44 per cent of the stock.

The broader Topix dropped 0.7 per cent to 1,253.00 and the JPX-Nikkei Index 400 fell 0.7 per cent to 11,312.65.

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