TOKYO, Dec 21 (Reuters) - Japan's Nikkei share average dropped on Thursday following a sharp sell-off on Wall Street overnight, slipping from near historical highs, while automaker Toyota's shares tumbled on a widening safety inspection scandal at its unit Daihatsu Motor.

The Nikkei lost 1.59% to close at 33,140.47. Of its 225 components, 187 declined, 36 rose and two were flat.

The broader Topix declined 1%.

On Wednesday, the Nikkei had reached 33,824.06 - approaching last month's 33-year peak of 33,853.46 - after the Bank of Japan stuck to a dovish posture a day earlier, disappointing traders who had expected hints of a near-term exit from stimulus.

Japanese equities had also been riding the rally in U.S. stocks that took the Dow and Nasdaq to record highs this week, amid expectations that the Federal Reserve is close to cutting interest rates and the economy is set for a soft landing.

"This (Nikkei's decline) is a reaction to what happened in U.S. equity markets overnight," said Sumitomo Mitsui DS Asset Management chief macro strategist Masayuki Kichikawa, adding that the record Wall Street rally was "overextended".

However, with evidence building for a U.S. soft landing and Japan's own economy showing signs of robustness, "there should be more upside rather than downside for equities in Japan", including for the remainder of this year, he said.

Toyota declined as much as 5.6% before closing 4% lower, after its small car-making unit said it would halt all vehicle shipments following an independent panel's finding that collision tests had been rigged.

Toyota's slump made transport equipment the worst performer among the Tokyo Stock Exchange's 33 industry groups with a 2.87% slide.

Uniqlo store owner Fast Retailing was another standout underperformer, with its 3.91% drop making it the Nikkei's biggest drag due to its heavy weighting. (Reporting by Kevin Buckland; Editing by Rashmi Aich)