The Nikkei ended 0.2 percent higher at 20,347.48 points, paring earlier gains which had seen it rise to as high as 20,481.27, the strongest level since August 2015.

The dollar was 0.2 percent higher at 112.40 yen after brushing 112.645, its highest since July 18 after the U.S. central bank said it will begin to reduce its balance sheet from next month and indicated that one more rate increase by the end of the year remains possible despite a recent bout of low inflation.

"Since both U.S. and Japan's monetary decisions are out, investors have started taking profits a bit," said Yutaka Miura, a senior technical analyst at Mizuho Securities. "For the next few weeks, U.S. economic indicators and headlines related to a snap election will likely move the market."

Government sources have told Reuters that Prime Minister Shinzo Abe is considering calling a snap election for as early as next month and will pledge to use some of the revenue from a scheduled sales tax hike in 2019 to fund spending on education and child care.

Banking shares rose, tracking their U.S. peers on the prospect of higher interest rates.

The Tokyo Stock Exchange's bank sub-index rose 1.0 percent. Mitsubishi UFJ Financial Group rose 1.7 percent and Mizuho Financial Group advanced 1.2 percent.

Shares of companies that supply components to Apple Inc slipped, after reports that a Rosenblatt Securities' analyst said iPhone 8 pre-orders have come in well below those for its predecessors.

Separately, Apple said on Wednesday its latest smartwatch unveiled a week ago has connectivity issues.

Murata Manufacturing Co Ltd shed 1.1 percent, while Alps Electric Co Ltd tumbled 2.4 percent and Nitto Denko Corp dropped 2.6 percent. Apple shares declined 1.7 percent overnight.

The broader Topix gained 0.1 percent, and the JPX-Nikkei Index 400 was flat. (Reporting by Lisa Twaronite and Ayai Tomisawa; Editing by Kim Coghill)