Japan's Nikkei share average dipped on Monday after financial leaders' pledge to raise the size of the IMF's firewall failed to ignite risk appetite, and as investors grew cautious ahead of Bank of Japan and US Federal Reserve policy meetings this week.
"There's no real incentives today (to buy).The market is scared of the BOJ's decision falling short of expectations, and then the yen strengthening against the dollar. People are sitting tight until they hear what the BOJ has to say," said Ryota Sakagami, chief strategist of equities at SMBC Nikko Securities.
The benchmark Nikkei finished down 0.2% at 9,542.17 after hitting a high of 9,636 in mid-morning trade, as investors sold off index futures and bought up five-year Japanese bonds on the back of an article saying the Bank of Japan would begin purchasing bonds with longer maturities.
"The JGB story is leading the futures flow in the Nikkei. Some of the CTAs basically are buying JGBs and selling futures," a senior dealer at a foreign bank said.
CTAs, which stands for commodity trading advisers and refers to hedge funds that bet on futures, were reacting to an Asahi Shimbun article saying the BOJ would expand its asset purchase programme and target bonds with maturities of up to five years from two years.
The morning's slide was compounded by an HSBC report that showed China's industrial activity remained weak.
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"It's actually an improvement, but it's still below the magic 50 which means the economy is in balance," said a senior trader at a foreign bank.
The HSBC Flash Purchasing Managers Index showed Chinese factory activity had recovered to 49.1 in April from 48.3 in March, but still contracted for the sixth month running.
Among big movers was Rakuten, Japan's largest shopping operator, which shed 3.9% after it said it will close down its website in China due to sluggish sales.
Mitsui Chemicals Inc also underperformed the index, losing 4.1% after the company said there had been an explosion and fire at its glue factory, killing one employee and injuring some 20 workers and nearby residents.
Among outperforming shares, Yakult Honsha Co Ltd jumped 11.7% after Kyodo News said French food firm Danone may increase its stake in the Japanese drink maker to 28% from 20%.
Trading volume was thin, with 1.53 billion shares changing hands on the main board, marginally higher than Friday's trade.
The broader Topix index finished down 0.3% 809.54.
Few incentives
The Nikkei initially opened higher after leading world economies on Friday pledged an additional $430 billion for the International Monetary Fund to contain the euro zone debt crisis, but the optimism soon faded.
"It kind of helps at the margins to know that the IMF is attracting global support, but if Spain or Italy were to seriously run into deficit problems, $450 billion (is insignificant)," said a senior trader at a foreign bank, adding that investors were unlikely to be too impressed by the move.
" Volumes are very light at the moment...going into the latter half of this week the action should hot up," he said.
Market participants widely expect the BOJ to further ease policy at its meeting on Friday by expanding its 65 lakh croreyen asset-buying and loan programme by 5 lakh crore or 10 lakh crore yen, with the increase to be used to buy government bonds.
Solar-related companies bucked the trend on Monday after the Nikkei business daily said the government was looking to set a feed-in tariff rate of 42 yen per kilowatt-hour for utilities to purchase all electricity generated from solar, wind, geothermal and other renewable energy sources.
Tokuyama Corp , Ulvac Inc, Kyocera Corp and Sharp Corp gained between 1.9 and 3.3%.