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Japan's Nikkei share average fell below 13,000 on Tuesday morning, as sellers were encouraged by lingering worries about stress in China's banking system and the US Federal Reserve's plans to roll back its stimulus later this year.
The Nikkei fell 0.6% to 12,978.90 after opening marginally higher.
Analysts say the mood is likely to remain subdued as a recent spike in interbank borrowing costs have raised fears that stress in China's banking system could weigh on already slowing growth.
Manufacturers with high exposures to China lost ground, with Komatsu Ltd falling 2.8%, Hitachi Construction Machinery Co shedding 2.0% and Nissan Motor Co dropping 0.9%.
"Investors are waiting for the Chinese market to open and want to decide what positions they should take," said Toshihiko Matsuno, chief strategist at SMBC Friend Securities. "There is relatively smaller volatility in the market today, but the direction could go either way depending on cues from China."
The benchmark Nikkei has dropped more than 18% since reaching a 5-1/2-year high on May 23, hurt by slowing growth in China, Fed stimulus concerns and disappointment over the Japanese government's recently unveiled growth strategy.
Analysts expect steep falls for Japanese equities are unlikely during the session given that concerns over China had already dented the market in the previous day.
The Topix dropped 0.8% to 1,080.98.
Analysts also said the market remains under pressure on concerns that US monetary stimulus will be scaled back in the near term. The Federal Reserve last week confirmed plans to scale back the amount of cheap money being pumped into the US economy later this year, sending global risk assets skidding sharply.
"There are few negative factors in the domestic market, but global worries are keeping investors from taking positions," Kenichi Hirano, a strategist at Tachibana Securities said.
Market players, however, expect losses to be contained as the dollar is trading around 97-98 yen, which is higher than the 90-95 yen range that most companies have based their earnings for this fiscal year. A weaker yen lifts exporters' competitiveness in overseas markets and their earnings when repatriated.
Exporters were mixed on Tuesday, with Toyota Motor Corp falling 0.4%, Nikon Corp adding 0.7% while Sony Corp was down 0.2%.
