Nikkei drops to 2-week low on talk of US Fed rate hike; BoJ uncertainty spooks investors

Japan's unexpectedly strong July core machinery orders did little to help the stock market

Japanese stocks fell nearly two per cent to two-week lows on Monday after comments by US Federal Reserve officials sparked expectations of a rate hike as soon as next week, weighing on shares and other riskier assets globally.

The Nikkei fell 1.9 per cent to 16,647.52 points by late morning, its lowest since August 29. It traded below its 200-day moving average for the first time in more than a week.

Investors were risk averse after Wall Street tumbled on Friday, with the S&P 500 seeing its worst day since June after Boston Fed President Eric Rosengren, a historically dovish policymaker, said the Fed faced increasing risks if it waited too much longer to raise interest rates.

"The market is worried that the Fed mentions an interest rate hike even though the recent economic readings were weak," said Toru Ibayashi, head of CIO Wealth Management at UBS Securities.

"People are worried as the Fed is not communicating with the market well," added Ibayashi.

All of the Topix's 33 subsectors were in negative territory, with cyclical stocks battered in particular.

Toyota Motor Corp dropped 1.6 per cent, Advantest Corp shed 1.9 per cent and Panasonic Corp fell 2.2 per cent.

Securities stocks also took a hit. Nomura Holdings shed 2.3 per cent and Daiwa Securities Group tumbled 3.0 per cent as investors have become risk averse.

Unexpectedly strong, Japan's July core machinery orders, which showed an increase of 4.9 per cent in July from the previous month, did little to help the stock market.

Anxiety is also growing ahead of next week's Bank of Japan (BoJ) policy review, which coincides with the Fed's.

Sources familiar with its thinking told Reuters last week that the BoJ is now studying several options to steepen the bond yield curve as authorities desperately seek tools to revive an economy that has failed to emerge from stagnation despite years of massive stimulus.

The yield on the 30-year Japanese government bonds jumped four basis points on Monday to hit its highest level since late March on expectations that the BoJ may seek to steepen the yield curve and possibly taper its bond buying.

The broader Topix dropped 1.7 per cent to 1,320.59 and the JPX-Nikkei Index 400 declined 1.8 per cent to 11,841.02.