The yen surged to an eight-month high against the dollar on Monday as Japanese officials waved off any plans to stem the currency's rise, driving the Nikkei down more than 2 percent and sparking a broad retreat in risky assets.
The yen's jump against the dollar has it poised to make a run at the 13-year peak of 87.10 struck earlier in the year, with the rise through levels that Japan's big exporters had planned for this financial year hitting their shares.
The Japanese currency's climbed as senior officials again made clear they were not considering intervention to stem the rise at this point, with Finance Minister Hirohisa Fujii telling Dow Jones Newswires that the rise was not abnormal.
Fujii later said yen moves were becoming one-sided and stable moves were desired, but market players were more focused on the hands-off aspect of his remarks.
Those comments reinforced the perception that the new ruling coalition is taking a different tack on currency policy than its predecessor and that Japan is no longer as trigger-happy as it once was, having spent about $400 billion to protect its fragile economic recovery in 2003 and 2004.
There is little caution toward the government intervention at the moment because Japanese authorities say they are not thinking about taking action, said Hideki Hayashi, global economist at Mizuho Securities in Tokyo.
In the longer term, the dollar could resume its slide against the yen if data, such as U.S. jobs later this week, points to a subdued recovery.
The Nikkei share average <.N225> shed 2.4 percent in morning trade to hit a two-month low and briefly fell below the 10,000 line. Among exporters, Honda Motors <7267.T> fell 5.3 percent and electronic parts maker Kyocera Corp <6971.T> lost 2.6 percent -- among the biggest drags on the index.
The dollar fell as far as 88.23 yen on trading platform EBS before trimming losses to 89.33 yen, down 0.3 percent on the day. The yen staged broad gains, with the euro down 1.1 percent at 130.25 yen and sterling shedding 1.4 percent to 141.10 yen.
Other Asian equity markets also retreated, but losses were smaller than those in Japan. The MSCI benchmark of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell 1.4 percent. South Korea's KOSPI index <.KS11> was down 1 percent, while Taiwan's TAIEX <.TWII> dipped 0.9 percent.
Some foreign investors were also pulling funds out of Asian stock markets before quarter-end, partially reversing some of the heavy buying that has taken place over the past six months on bets favoring the region's growth prospects.
Foreign investors were sellers for a third consecutive session in South Korea on Monday.
Without strong buying by foreign investors, markets are turning lower, and weaker-than-expected U.S. economic data are weighing on sentiment, said Choi Seong-lak, a market analyst at SK Securities in Seoul.
Weaker-than-forecast reading of U.S. housing sales and durable goods orders on Friday pushed the U.S. S&P 500 index <.SPX> down 0.6 percent on Friday. S&P futures were down 0.3 percent in Asia trade.
Commodity prices also came under pressure.
U.S. crude oil shed 43 cents to $65.59, extending last week's 8.4 percent slide after data showing a build-up of U.S. inventories raised worries about the strength of demand.
Gold prices dipped 70 cents to $990.25, partly as the dollar staged a broad rebound despite its losses against the yen.
The dollar index, a gauge of its performance against six major currencies, was up 0.8 percent at 77.136 <.DXY>. The euro slid 0.8 percent to $1.4580.
The drop in equities propped up government bonds. The benchmark 10-year Japanese government bond yield fell 2.5 basis points to 1.285 percent, while the U.S. 10-year Treasury note dipped 2 basis points to 3.307 percent.
(Additional reporting by Rika Otsuka in Tokyo and Jungyoun Park in Seoul; Editing by Tomasz Janowski)