* Canon weighs on precision equipment sector
* Dollar-yen top heavy at 112 limiting Nikkei's upside - traders
By Ayai Tomisawa
TOKYO, April 18 (Reuters) - Japan's Nikkei retreated from a 4-1/2-month high on Thursday as investors took profits, while Canon tumbled on a report that it will cut its earnings forecast, pressuring other stocks in the sector.
The Nikkei share average dropped 0.5 percent to 22,172.73 points by the midday break, after touching the highest level since early December on the previous day.
Some companies with large exposure to China extended gains, after soaring the day before on robust Chinese economic data, while defensive sectors such as drugmakers languished.
With the dollar dropping below 112 yen after briefly touching a four-month peak of 112.17 on Wednesday, investors are cautious before chasing the market higher, traders said.
"Investors are taking a wait-and-see approach and some are taking profits as it seems that the dollar-yen is top-heavy at around 112," said Yutaka Miura, a senior technical analyst at Mizuho Securities, adding that investors are awaiting Japanese corporate earnings for more cues.
Companies whose business years ended March will start releasing their full-year results later in the month.
Firms which rely heavily on Chinese demand rose, with Fanuc Corp up 0.7 percent and Keyence Corp gaining 1.2 percent.
Defensive drug shares dropped, with Takeda Pharmaceutical plunging 3.2 percent and Astellas Pharma falling 1.7 percent.
Canon Inc tumbled 3.5 percent after the Nikkei business daily reported it is expected to cut its earnings guidance for 2019 and expects operating profit to drop 20 percent to slightly above 270 billion yen, compared with the previously expected 325 billion yen.
Other precision equipment makers also lost ground, with Olympus shedding 1.9 percent and Omron declining 1.5 percent.
Automakers bucked the weakness, extending gains from the day before on continued optimism over U.S.-Japan trade talks.
Economy Minister Toshimitsu Motegi said the two nations have not agreed on auto issues and declined to comment on details.
Japanese officials have said Tokyo would not accept auto export restrictions if the U.S. makes such demands.
Toyota Motor Corp rose 1 percent and Honda Motor Co added 1.6 percent.
The broader Topix dropped 0.5 percent to 1,623.13. (Editing by Kim Coghill)