Asian stocks held on Wednesday close to their three-month high but Japanese shares fell as the dollar hit an eight-month low against the yen after weak US data fuelled talk of more Fed policy easing.
With the yen propped up near levels not seen since 1995, Tokyo stocks lagged the rest of Asia, sliding 1.5 per cent on fears that the currency strength will erode exporters' profits and sap economic growth.
Such concerns combined with a run of disappointing US data that cast a pall over recovery in the world's largest economy, boosted Japanese government bonds, pushing the 10-year yield below 1 per cent for the first time in seven years.
Investors held their breath as Japan's finance minister reiterated that he is closely watching currency moves as the dollar's weakness tests the tolerance for a stronger yen as the economy struggles to pull out of a crippling spell of deflation.
"Today's stock fall is really all about the yen. At this kind of level, there's inevitably worries about what sort of impact this will have on company earnings going forward," said Toshiyuki Kanayama, a market analyst at Monex Inc.
Chip gear manufacturer Tokyo Electron lost 3.1 per cent, while digital camera maker Canon Inc declined 3.7 per cent and electronics parts maker Kyocera Corp fell 2.3 per cent.
However, markets elsewhere in the region were holding up well with the MSCI Asia-Pacific index little changed from three-month highs hit on Tuesday.
Overnight, both the Dow Jones industrial average and the Standard & Poor's 500 Index fell as disappointing earnings and US consumer data trigged some profit-taking after Monday's rally drove them to a 10-week high.
Data showed US consumer spending and incomes were flat in June while home purchase contracts tumbled to a record low, implying an anaemic economic recovery for the remainder of this year.
US Treasury debt climbed, sending two-year yields to an all-time low, as the data fanned speculation that the Fed may launch a new round of debt purchases to inject cash into the economy.
Some weak earnings added to such concerns, with quarterly results from Dow Chemical Co and Procter & Gamble missing expectations.
Strong earnings have driven the stock market's recent rally, even as economic data have generally disappointed.
WEAK DOLLAR
Talk of further dollar easing prompted investors to cut their dollar exposure, pushing the US currency as low as 85.40 yen, its lowest since late November before it inched back to 85.51.
A fall below a November low of 84.82 yen would take the pair to its lowest level in 15 years.
"The market is full of dollar bears," said Ayako Sera, market strategist at Sumitomo Trust & Banking. "Some are speculating the Fed could announce a further relaxation of policy at its meeting next week".
The euro hovered near $1.3230, remaining within sight of a three-month high of $1.3262 reached on Tuesday.
Stronger growth in Europe and Asia has supported the view that central banks in those regions could raise interest rates before the Fed.
Spot gold rose as far as $1,194.75 an ounce, the highest in just over one week, as investors shifted out of equities on concerns about the US economy.
Oil fell as much as 41 cents to $82.14 a barrel after touching $82.64 on Tuesday, the highest in three months.
