Japanese stocks eased on Thursday as escalating violence in Egypt prompted investors to move to safer assets, while commodities extended their recent gains, underscoring growing inflationary pressures that could threaten the global economic recovery.
With the onset of long Lunar New Year holidays across much of Asia and a U.S. payrolls report looming Friday, investors took a step back as clashes between Egyptian President Hosni Mubarak's supporters and demonstrators became increasingly violent.
Brent crude oil futures approached $103 a barrel as Mubarak's supporters opened fire on protesters in Cairo in what many saw as an attempted government-backed crackdown on pro-democracy demonstrations.
Fears that unrest in Egypt and Tunisia will spread to other oil-rich countries in the Middle East overshadowed the bearish effect of soaring gasoline inventories in the United States.
Rising fuel and food prices have exacerbated worries that high inflation will force policymakers in Asia and other emerging markets to aggressively tighten policy, putting a dampener on a key driver of the global recovery.
Higher prices for raw materials are already squeezing corporate earnings. U.S. candy maker Hershey Co reported overnight that it was seeing meaningfully higher costs for ingredients such as cocoa and sugar, though productivity gains and cost savings are helping to support its profit margins for now.
While monetary tightening across Asia and EMs (emerging markets) generally is unlikely to get so aggressive that it crunches growth, it is still likely to worry investors, said Shane Oliver, chief investment strategist at AMP Capital Investors.
The short-term cautious stance on emerging markets is likely to see shares in developed markets such as the U.S. and Northern Europe outperform over the next six months, said Oliver.
Japan's Nikkei <.N225> fell 0.2 percent, after posting its biggest jump in two months the day before.
Weighing on the index, shares of Panasonic Corp <6752.T> fell 3.4 percent yen after it posted a worse-than-expected 5.6 percent fall in quarterly profit as tough price competition and a stronger yen offset help from Japan's incentive scheme for eco-friendly appliances.
Overall, foreigners remained net buyers of Japanese stocks for a 13th straight week on optimism that the U.S. and global recoveries were still gathering strength.
Foreign buying rose if we look at inflows, but it actually fell when we consider number of shares bought, indicating that foreigners have shifted into more expensive, major shares of exporters as hopes for a pickup in the U.S. economy are on the rise, Yamagishi said.
U.S. private employers added more jobs than expected in January, the 12th consecutive month that companies took on staff, adding to hopes that the American labor market is slowly recovering and bolstering hopes for the more comprehensive U.S. jobs report Friday.
In currency markets, the euro eased from a 2-1/2 month high of $1.3860 against the dollar, though traders believed the single currencies' uptrend was still intact given signs of inflation in the euro zone.
Elsewhere in Asia, Australia's main share benchmark <.AXJO> rose 0.4 percent as strong metals prices continued to support shares of resources firms. Mining giants BHP and Rio Tinto both rose more than 1 percent as copper prices stayed near $10,000 a ton, with supplies tight against strong demand.
Markets in Greater China, South Korea and much of Southeast Asia were closed for Lunar New Year holidays.
(Additional reporting by Antoni Slodowski in TOKYO)
(Editing by Kim Coghill)