By Chikako Mogi
TOKYO (Reuters) - The Nikkei entered bear market territory on Friday as the yen rose against the dollar on concerns that the key U.S. jobs data will disappoint, while wary investors awaiting clarity on the Federal Reserve's stimulus sent Asian shares to six-month lows.
Worries the nonfarm payrolls will undershoot expectations prompted investors to cut heavy bets that had been profitable for months, particularly those seeing the U.S. currency rise against the yen on a firming U.S. economy, and those buying Japanese stocks on hopes a weaker yen will underpin the Nikkei.
The benchmark Japanese stock average plunged as much as 1.9 percent to a fresh two-month low, having shed 20 percent from a 5-1/2 year high reached two weeks ago. The broader Topix index shed as much as 2.4 percent.
Asian shares failed to capitalise on an overnight gain in Wall Street as investors sought to square their positions before the payrolls data that may shed clues over whether the Fed could start tapering its stimulus programme in coming weeks.
Economists expect 170,000 jobs to have been added to the U.S. economy in May and the unemployment rate to hold at an almost 4-1/2-year low of 7.5 percent.
"Selling pressure will probably be restrained ahead of the employment data out of the U.S. tonight as it could very well go either way," said William Leys, premium client manager at CMC Markets.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6 percent to its lowest since late November.
Australian shares dropped 0.7 percent to a fresh 4-1/2-month low while a tumble in heavyweight Samsung Electronics <005930.KS> drove Korean shares down 1.4 percent. Hong Kong shares were down 0.5 percent.
After recovering to a high of 97.52 earlier, the dollar was back down 0.5 percent against the yen at 96.44, following a more than 3 percent plunge overnight to a seven-week low of 95.90 yen. The dollar index, measured against a basket of six major currencies, eased 0.11 percent but held its lowest since February 25 of 81.077 hit on Thursday.
BLAME RISING YIELDS
Market volatility reflects a retracement from excessive fears about the reduced Fed stimulus and high expectations for Japan to end deflation and boost growth, analysts said.
The recent pull-back in global financial markets was sparked more than two weeks ago when Fed Chairman Ben Bernanke suggested the U.S. central bank could start paring massive bond purchases as soon as the Fed's next few meetings if the economy improves further.
Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said market players may be shifting their focus to higher yields, with U.S. yields rising on speculation about an eventual unwinding of the strong U.S. stimulus, while Japan's bold monetary stimulus has helped eased appetite for safe-haven German bonds. Japanese government bond yields have also faced upward pressures.
"Recent yield increases have brought about an unintentional tightening environment, lessening the degree of effectiveness from monetary stimulus provided by major central banks. This may be starting to unnerve markets," Hattori said.
Corrections have been far deeper for Japanese stocks and the yen as the Nikkei had surged over 80 percent from mid-November to last month's peak, while the yen had slumped 30 percent against the dollar in the same period, when speculators boosted their bets that Prime Minister Shinzo Abe will pursue strong reflationary policies. The Bank of Japan's unprecedented stimulus unveiled in early April had strengthened such bets.
The turmoil accelerated and crushed Japanese stocks as "Abenomics" -- monetary easing, fiscal spending and growth strategies -- failed to live up to blown-out market expectations for bold growth-spurring steps, triggering a wave of yen selling and Nikkei buying, all weighing on broader Asian bourses.
"It's not what Abe has announced that I am sceptical about. It's the way that policy is being directed and executed. It's the fact that Abe's 'three arrow' policies have been directed more towards changing expectations than reality," Robert Rennie, head of currency strategy at Westpac, said in a note.
Some analysts pointed to markets responding too negatively to the impact from potential Fed tapering.
Credit Suisse said in a research note that three key differences from stock corrections in past cases of Fed stimulus reduction suggested investors may be too pessimistic this time.
In previous cases, stock valuations were high, European risks were heightening and U.S. recovery was poor. Now, stock valuations are lower, European risks are lessening and the U.S. economy is improving. "We continue to suggest investors buy markets closer to trough valuations," it said.
The dollar steadied against the euro at $1.3251 after the common currency spiked to a three-and-a-half-month high of $1.3306 on Thursday, drawing support from the European Central Bank's decision to leave interest rates unchanged and as ECB President Mario Draghi said further monetary support was unlikely in the near future.
Draghi said the ECB was technically ready for negative deposit rates - the rate it pays commercial banks to hold their money - but there was no reason to act right now.
U.S. crude futures steadied at $94.81 a barrel while Brent was up 0.2 percent to $103.81.
(Additional reporting by Maggie Lu Yueyang and Thuy Ong in Sydney; Editing by Eric Meijer and Michael Perry)
