Japan's Nikkei trades lower as investors continue to book profits

TOKYO, Feb 29 (Reuters) - Japan's Nikkei share average traded lower on Thursday, as investors sold stocks to lock in profits from the index's record highs.

The Nikkei was down 0.65% at 38,953.49 by the midday break, trading below the 39,000 level for the first time since Feb. 22.

The broader Topix fell 0.62% to 2,658.26.

"Investors sold stocks to lock in profits after the Nikkei paused a rally," Naoki Fujiwara, senior fund manager at Shinkin Asset Management, said.

"But I see demand for buying stocks on dips. And investors seem to have shifted their targets to smaller stocks."

The Nikkei eased back on Wednesday from an all-time peak scaled in the previous session, with technical signals suggesting that the more-than-9% gain made over the previous three weeks had been too rapid.

On Thursday, technology investor SoftBank Group fell 1.39% to drag the Nikkei the most. Ceramics maker Kyocera lost 1.5%.

Sentiment was hurt by the latest data from the finance ministry, which showed foreign investors turned net sellers of Japanese stocks in the week when the index scaled an all-time high, Ryutaro Sawada, senior market analyst at Tokai Tokyo Research Institute, said.

Foreign investors sold 200 billion yen ($1.33 billion) of Japanese stocks in the week ended Feb. 24, pausing a seven-week buying streak.

Bucking the trend on Thursday, Aozora Bank surged 9.44% after public disclosure showed an activist fund City Index Eleventh owns 5.42% in the Tokyo-based bank.

Seven & i Holdings rose 4.83% after media reported that the convenience store chain operator was considering selling a supermarket unit to investment funds. A company spokesman said there was no truth to it.

Shipping firms, which lost 2.7% so far this week, rose 1.29% to become the top performer among the Tokyo Stock Exchange's 33 industry sub-indexes.

($1 = 150.0000 yen) (Reporting by Junko Fujita; Editing by Mrigank Dhaniwala)