Japan led Asian stocks lower on Tuesday as worries about the flagging U.S. economy triggered profit taking across the region and fed a five-month rally in U.S. and Japanese government bonds.
With policymakers around the world cautious about adding new stimulus measures to support their recoveries, safety has been the name of the game in August.
Gold prices have risen around 5 percent this month, on track for the largest monthly gain since April, while the benchmark yield on the 10-year U.S. Treasury note dropped 38 basis points in August, its biggest drop since December 2008.
Investors ignored slightly stronger-than-expected U.S. consumption data and focussed on the August U.S. payrolls report due on Friday to see if private sector hiring held up despite expected layoffs in the public sector.
A disappointing payrolls figure for a third consecutive month will likely depress bond yields further and put upward pressure on the yen, which is hovering near a 15-year high against the dollar.
Though the U.S. spending data yesterday wasn't bad, it's the indicators out later this week that are the really important ones, and predictions for these are really raising fears about the economic recovery, said Takashi Ushio, head of the investment strategy division at Marusan Securities in Tokyo.
Japan's Nikkei share average <.N225> slid 2.6 percent, led by a mix of technology and retailing stocks.
The Nikkei has tumbled more than 6 percent in August, set for the largest monthly decline since May, on worries that the global recovery may be stalling and as the surging yen threatened to curb exports, the one bright spot in the country's economy.
The MSCI index of Asia Pacific stocks outside Japan slipped 0.9 percent <.MIAPJ0000PUS>, with commodity-related shares the biggest drag on fears of weaker demand for raw materials.
The region has fared better in August than others, however, thanks to its relatively strong growth prospects. The Asia Pacific ex-Japan index is down 1.7 percent in August compared with the 3.7 percent decline on the MSCI world equities index <.MIWD00000PUS>.
The yen has strengthened for four straight months against the dollar, its longest string of gains since 2008. On Tuesday, the dollar was down 0.2 percent to 84.45 yen, near a 15-year low of 83.58 yen touched last week.
The Bank of Japan boosted a cheap loan scheme on Monday after an emergency meeting, but investors saw the move as a minimal, symbolic gesture that will do little to halt the yen's climb.
Market players may now test the government's resolve to back its words with yen-selling intervention, analysts said, though few expect it to move any time soon unless the currency's gains accelerate.
Even then, traders said intervention would not have much effect in weakening the yen unless it is backed by aggressive monetary easing.
The Australian dollar jumped after a report showed retail sales blew past expectations, up 0.2 percent to US$0.8935, 3 cents below a three-month high reached in early August.
Government bonds rose as equity markets sagged.
The 10-year U.S. Treasury yield slipped to 2.53 percent from 2.55 percent late on Friday in New York.
After a sharp drop on Monday, Japanese government bond futures rose 0.28 point to 142.73.
However, supply concerns could haunt long-maturity paper after Japan's Prime Minister Naoto Kan said the government could compile an extra budget if necessary, after the cabinet decided on Monday to compile economic steps using reserves from this fiscal year's budget.
(Additional reporting by Elaine Lies in TOKYO)
(Editing by Kim Coghill)