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 2.5 percent and sparking a broad retreat from riskier assets.
The yen later gave up some gains as Finance Minister Hirohisa Fujii changed gears on his comments during the course of the day, saying yen gains were becoming one-sided just hours after saying the rise was not abnormal.
European shares looked set for a third straight session of losses, with futures on the Dow Jones Euro Stoxx 50 down 0.3 percent.
Other Asian equity markets also retreated, but losses were smaller than those in Japan and portfolio manager selling before the third-quarter wraps up also played a role. Commodities slid and the dollar got a broad safe-haven boost despite its dip against the Japanese currency.
While Fujii appeared to tone down his comments, analysts and traders said the consistent message was that Japan was taking a hands-off approach and is no longer as trigger-happy as it once was on forex market intervention, having spent about $400 billion selling yen to protect its fragile economic recovery in 2003 and 2004.
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.
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, point to a subdued recovery.
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 percent at 130.45 yen and sterling shedding 1.2 percent to 141.35 yen.
The Nikkei share average <.N225> shed 2.5 percent to hit a two-month low and briefly fell below the 10,000 line. Among exporters, Honda Motors <7267.T> fell nearly 5 percent and electronic parts maker Kyocera Corp <6971.T> lost 3.4 percent -- among the biggest drags on the index.
The MSCI benchmark of Asia-Pacific shares outside Japan fell 1.2 percent, while the Thomson Reuters index for regional shares <.TRXFLDAXPU> shed 1.3 percent.
Hong Kong's Hang Seng index <.HSI> fell 1.9 percent, with South Korea's KOSPI index <.KS11> down 0.9 percent and Taiwan's TAIEX <.TWII> off 0.8 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 stock 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-expected 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 0.2 percent in Asia trade.
Commodity prices also came under pressure, with investors shrugging off the outcome of the Group of 20 summit in Pittsburgh and Iran's saber-rattling.
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 $2.45 to $988.50, 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 0.6 percent at 77.040 <.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 3 basis points to 1.285 percent, the lowest in nearly three months. 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 Kim Coghill)