The benchmark slipped 0.40 percent to 28,791.71, with about 12 stocks declining for every one that rose, Reuters reported.

The broader Topix lost 0.33 percent to 1,992.33 but also marked the best year-end close since 1989, following a 10.4 percent rally this year.

The Nikkei has rallied 4.9 percent this year, driven by fiscal and monetary stimulus as well as optimism for a post-pandemic economic recovery that has lifted stocks to records globally this year.

"The backdrop for stocks looks good next year," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, predicting the Nikkei would top 30,000 by end-March.

"Omicron looks like it won't result in a big shock for markets [and] investors don't seem concerned about the prospect of two or three rate hikes by the Federal Reserve next year."

The Nikkei hit its highest level of 2021 in September at 30,795.78, a first since 1990, the year of the stock market crash which ushered in a "lost decade", a banking crisis and years of deflation and weak domestic demand from which Japan has yet to recover.

"During the bubble, price-to-earnings ratios were very elevated, but the Nikkei isn't so expensive now, so a break of 30,000 isn't a reason to worry," Ichikawa said.

In 1990, the market traded at about 50 times expected earnings, compared with around 15.5 times currently.

None of 1990's Japanese banks with hefty market capitalizations exist now, as they subsequently suffered massive loan losses and repeated mergers to survive. Now, the market is led by Toyota Motor, followed by SoftBank Group.

"It's true that Japanese stocks have been pulled higher by overseas markets, but strong earnings at Japanese companies have also been an important driver," said Takuya Yamada, an executive officer in the investment management department at PayPay Asset Management.

On Thursday though, every Nikkei sector was lower. Uniqlo store-operator Fast Retailing was the biggest drag, sliding 0.55 percent, while Nintendo dropped 2.03 percent and sauce maker Kikkoman lost 2.13 percent.

SoftBank Group was the biggest gainer by index points on Thursday, rising 1.46 percent. The biggest percentage gainer was Z Holdings, formerly known as Yahoo Japan, which rallied 3.33 percent.

Asian stocks were mostly flat on Thursday in cautious holiday trade following a mixed close on Wall Street, though Chinese artificial intelligence start-up SenseTime was a big winner with a 23 percent jump on its Hong Kong debut.

Fears of the Omicron coronavirus variant are still weighing on markets, with the United States hitting its highest-ever seven-day average of new COVID-19 cases and the World Health Organization warning that a "tsunami" of infections would push health systems to the brink of collapse.

But investors have also clung to data showing a reduced risk of hospitalization from Omicron and the fact that trading volumes are extremely low in the period between Christmas and the New Year.

"Despite global surges in COVID cases, the markets are reflecting the new reality that COVID is here to stay, albeit more on our terms than its," Kevin Philip, managing director at Bel Air Investment Advisors, said in an email.

Next year, he added, "we are facing less of a COVID-influenced world and a return toward normalcy."

Tokyo was marginally down at the close on its last trading day of 2021, but the benchmark Nikkei index rose nearly 5 percent for the year to its highest annual close since the 1989 boom.

Hong Kong and Shanghai both closed slightly higher.

SenseTime was among stocks bucking the trend, with its price well up only a week after it was blacklisted by the United States over accusations of genocide in Xinjiang.

The sale boosted the wealth of company cofounder Tang Xiao'ou. The MIT alum's wealth jumped by $500 million to roughly $3.9 billion, according to the Bloomberg Billionaires Index.

Also in Hong Kong, shares in embattled Chinese property giant Evergrande tumbled 10 percent after a report that the group had failed to meet two more offshore payments.

But markets were mostly sedate overall.

Seoul and Taiwan recorded small dips, while Wellington and Manila were slightly up.

"Ahead of year-end and New Year holidays, the number of market participants is low and trade will likely remain lethargic," Mizuho Securities said.

"Asia is having a mixed day [...] and it appears that some pre-New Years Eve book squaring is weighing on some markets," said Jeffrey Halley, a senior market analyst with OANDA.

Things were similarly quiet at the open in Europe.

London fell 0.2 percent, Frankfurt's was down 0.1 percent and Paris was fractionally lower.

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