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Japan's Nikkei share average dropped on Tuesday morning in choppy trade as exporters lost ground after the dollar broke below the 100-yen level on the back of soft US manufacturing data overnight.
The Nikkei fell 0.9% to 13,140.17 after flirting with positive territory earlier.
The index has fallen 17.5 % from a 5-1/2 year peak hit last month, hurt by worries over slowing growth in China and concern that the US Federal Reserve may scale back its stimulus policies earlier than the market had expected.
But Monday's data showing US manufacturing contracted in May for the first time in six months eased worries about the stimulus programme, although a more important jobs report is due later this week.
Exporters led the declines, with Toyota Motor Corp dropping 3.6% to 5,600 yen and was the most traded stock by turnover. Honda Motor Co shed 2.5% and Sony Corp tumbled 3.4%.
Market players said that investors are focusing on whether the Nikkei will break below the 13,000 mark, a level that existed before the Bank Of Japan announced sweeping monetary easing under the new Governor Haruhiko Kuroda.
If it breaks below that level and is headed further south, it means that Japan is heading towards a bear market.
"The market is focused on the 13,000 mark. But even now, some sectors, which are beneficiaries of easy monetary policy, are already in bear market, so we can say that 'premiums added on the back of the Kuroda magic were already stripped off from risk assets," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
Such sectors as financials and real estate, which rose on Prime Minister Shinzo Abe's reflationary policy and the central bank's aggressive monetary easing, have dropped sharply on profit-taking over the past few sessions.
The banking sector has lost 22 % since touching a 4 1/2 year high on May 15, while the real estate sector has fallen 26% since hitting a 5-1/2 year peak on April 12.
JREITs, which hit a 5-1/2 year high on April 5, has fallen more than 20%.
The Topix dropped 1.1% to 1084.48.
DOLLAR FALLS
On Monday, the dollar fell below 100 yen, hitting as low as 98.86 yen, its lowest since May 9, as the weak US data raised concerns about the US economy. The dollar last traded at 99.46.
The dollar slightly pared its losses versus the yen after news of a potential Japanese policy shift on investments made by public pension funds.
Sources told Reuters that Japan's government is set to urge the public pension funds - a pool of over $2 trillion - to increase their investment in equities and overseas assets as part of a growth strategy being readied by Prime Minister Shinzo Abe.
"Pension funds tend to play it safe... they invest in equities when stock prices are cheap, but if that trend is changing it would serve as a support to investor sentiment," said Toshihiko Matsuno, senior strategist at SMBC Friend Securities.
"But it's too early to believe that pension funds are aggressively chasing the market higher, so we need more details."
