In the final trading session of the year, the 225-issue Nikkei Stock Average finished 115.17 points, or 0.40 percent, lower from Wednesday at 28,791.71.
The broader Topix index of all First Section issues on the Tokyo Stock Exchange closed 6.66 points, or 0.33 percent, lower at 1,992.33. The market capitalization of all companies listed on the section rose to around 728 trillion yen (6.3 trillion U.S. dollars), a record high at the end of the year for the first time in four years.
The Nikkei started 2021 above the 27,000-point mark and continued an uptrend early in the year amid easing monetary policies applied by major central banks to promote economies hit by the COVID-19 pandemic. Also supported by upbeat earnings of domestic firms, the Nikkei topped the 30,000-point mark in February for the first time in more than 30 years.
However, it gradually lost steam on the spread of coronavirus across the country. Market participants preferred not to invest in risker assets after Japan marked record daily infections of more than 20,000 in the summer.
The index went beyond the 30,000 mark the second time within the year in September after Former Prime Minister Yoshihide Suga's announcement of not seeking re-election, which brought hopes for new measures to curb the virus while lifting the economy.
The stock market also came under pressure in the final months of the year due to the spread of the Omicron variant of the virus. Global semiconductor shortages and surging oil prices also dragged down investor sentiment, brokers said.
"The coronavirus pandemic really threw the market around, but overall it wasn't a bad year," said Chihiro Ota, assistant general manager of investment research at SMBC Nikko Securities Inc. "The market moved at a very high level. Manufacturers, including chipmakers, were really growing."
Although the Nikkei advanced three years in a row, the increase was smaller than the last two years and lagged behind the growth in the U.S. and European markets.
Norihiro Fujito, the senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co., attributed Nikkei's smaller growth to sluggish personal consumption as wage growth in Japan remains stagnant compared with other countries.
Many market analysts express confidence for 2022, forecasting the benchmark 225-issue Nikkei Stock Average to rise to as high as 34,000, a level not seen since March 1990. The downside is expected to hold firm at the 26,000 line.
Masahiro Ichikawa, the chief market strategist at Sumitomo Mitsui DS Asset Management Co., projected the Nikkei to regain the 30,000 mark during the first quarter, saying, "Since people have become more used to the coronavirus pandemic, I don't expect it to interfere with the market as much."
Due to concerns that the COVID-19 infections in Japan may increase during the New Year holidays, Tokyo stocks opened low from the outset and moved in negative territory throughout the day.
By the close of play, land transportation, air transportation, and farm and fishery companies were major decliners. Losing issues outnumbered gaining ones 1,333 to 735 on the First Section, while 115 finished unchanged.
Trading volume on the main section decreased to 729.84 million shares from Wednesday's 852.58 million shares.
Japanese financial markets will be closed from Friday through Monday for the New Year holidays.
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