The central bank is likely to keep its benchmark interest rate unchanged as it awaits greater clarity on domestic wages and spending trends as well as policy changes by U.S. President-elect Donald Trump.

The Nikkei average dropped 0.72 percent to 39,081.71 while the broader Topix index settled 0.31 percent lower at 2,719.87.

Auto stocks surged on news of a potential Nissan-Honda tie-up. Nissan Motor shares surged 23.7 percent while Honda Motor fell over 3 percent. Toyota Motor rose over 2 percent and Mitsubishi Motors soared 19.7 percent.

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