The Nikkei average rose to a three-week closing high on Wednesday, but caution on the pace of economic recovery in the United States and the growing prospect of a split in Japan's ruling party were seen keeping further gains in check.
Weak US data has exacerbated worries about the health of the world's biggest economy, with an unexpected drop in May consumer confidence, a slowdown in regional manufacturing and a double-dip in home prices.
With the domestic economy burdened by heavy damage from the disaster in March, a lack of traction in overseas equity markets is likely to dampen appetite from investors, especially foreign players, who have led buying since the earthquake.
"Foreigners (have) slowed their pace of buying after a long buying streak," said Mattia Ciancaleoni, director of equity sales at Citigroup, adding that they may not actively build positions for a few weeks as they wait for Japanese manufactures to announce planned full-year earnings estimates in June.
Overseas investors were net buyers of Japanese stocks in the third week of May for a record 29th straight week, the Tokyo Stock Exchange said last week.
Their purchases are likely to slow after such a long period of buying, said Fumiyuki Takahashi, chief Japan equity strategist at Barclays Capital.
"Since last autumn, foreign investors have been buying Japanese shares because of cheap valuations compared to other markets and also due to excess liquidity in global markets. As their buying recently has not been driven by Japan-specific factors, it is likely to slow," Takahashi said.
The benchmark Nikkei climbed 0.3 percent to 9,719.61, extending its gain of 2 percent the previous day to close at its highest level in three weeks. But resistance is seen at its 200-day moving average just above 9,800.
The broader Topix index edged up 0.1 percent to 839.41.
The market is not being helped by the rising risk of further political paralysis in Japan as Prime Minister Naoto Kan faces a rebellion in his party, with opposition parties looking to put forward a no-confidence motion.
Analysts have said Kan should survive the vote in parliament, expected to be on Thursday, but said that he would still face big hurdles pushing policies through a divided parliament, including an extra budget to pay for rebuilding.
"This could mean more political indecisiveness," said Ayako Sera, market economist at Sumitomo Trust and Banking Corp.
But analysts have also said political deadlock is hardly new in Japan and that the market's course will largely hinge on upcoming US data, including manufacturing numbers due later on Wednesday. Trading volume was 1.98 billion shares, while advancers outnumbered decliners by 882 to 630.
Fast Retailing, the operator of Uniqlo, Japan's leading apparel chain, extend gains after a company executive said on Tuesday that the firm expected a sales boost from shoppers seeking lighter clothing this summer as the nation turns its air conditioners on low to conserve power.
Its shares climbed 2.6 percent to 12,150 yen after rising 2.5 percent the day before. Shares of small-cap solar panel companies surged in heavy trade, with Takashima at one point rising to a four-year high of 263 yen, up more than 7 percent on the day. Sankyo Metal Industrial Co Ltd was up 13 percent at 370 yen, rising to a two-year peak of 383 yen at one stage.
Solar shares have been extending gains since Kan pledged last week to double the amount of electricity supplied by renewable energy in the 2020s and after German Chancellor Angela Merkel announced on Monday the country would shut its nuclear reactors and expand the use of wind and solar power.