Asian shares hit a three-month low on Friday as concerns over bird flu in China and escalating tensions in the Korean peninsula unsettled investors as they counted down to potentially pivotal U.S. payrolls data out later in the session.
Japanese equities, however, soared and the yen hit a 3-1/2-year low against the dollar on Friday after the Bank of Japan's unprecedented monetary expansion, but Japanese government bonds had a turbulent session with the key 10-year bond yield soaring after hitting historic lows soon after trading started.
The MSCI's broadest index of Asia-Pacific shares outside Japan slid 1.1 percent to a three-month low, dragged lower by a 2.4 percent drop in Hong Kong shares and a 1.7 percent decline in South Korean shares to a two-month low. The pan-Asian index was set for a drop of 2.1 percent for the week, the sharpest weekly decline since mid-July.
European markets were likely to be subdued, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open little changed. U.S. stock futures were down 0.2 percent to suggest a weak Wall Street open.
Hong Kong shares tumbled to a four-month low on Friday, with growth-sensitive sectors taking some of the bigger hits on rising worries a new strain of bird flu in China could hurt the local economy.
"Everything is combining today to hurt the market," said Alfred Chan, chief dealer at Cheer Pearl Investment in Hong Kong. "The bird flu issue is at the top of people's minds now."
Adding to bearish sentiment was Thursday's report showing the number of Americans filing new claims for unemployment benefits hitting a four-month high last week, raising the risk of a weaker reading from Friday's payrolls data. An improving growth trend in the United States has been a key driver for investors taking on more risk.
The payrolls data will likely show employers added 200,000 jobs last month after hiring 236,000 workers in February and the jobless rate seen steady at a four-year low of 7.7 percent.
"Traders are not exactly being filled with confidence by the indicators from the U.S. so far this week," said Tim Waterer, senior trader at CMC Markets.
BOJ BOOSTS NIKKEI, JOLTS JGB
Japan's Nikkei stock average outperformed, extending gains sharply to jump more than 4 percent soon after trading started, topping the 13,000 level for the first time since August 2008.
New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would be nearly doubled to 270 trillion yen ($2.8 trillion) by the end of 2014 as shock therapy to end two decades of stagnation.
"It means that the BOJ is deathly serious about their plans to reflate the economy," said Neal Gilbert, market strategist at GFT Forex, in a note to clients.
The dollar hit a fresh 3-1/2-year high of 97.20 yen on Friday, before paring some gains to trade at 96.43, while the euro rose to 125.61 yen before losing some momentum to trade at 124.64.
The 10-year Japanese government bond yield climbed 18 basis points to 0.615 percent after slumping to a record low of 0.315 percent earlier in the day. Ten-year JGB futures dropped 2.49 points to 143.55 on the day to a near two-month low after soaring to a record high of 146.41 in morning trade.
Several active corporate pension funds continued to buy 20-year and 30-year JGBs, pushing 30-year yields below 20-year yields, while many regional banks and cooperatives sold long-term and superlong JGBs to buy 5-year JGBs on dips.
Some dealers were forced to buy liquid 10-yr JGBs for hedging purposes after selling superlong JGBs short.
A Japanese strategist said dealers who received orders from clients wanting to book profits from Thursday's rally hedged by selling futures, triggering a broad sell-off.
BOJ ADDS TO LIQUIDITY WALL
With the BOJ announcing the world's most intense burst of monetary stimulus, some worry that Asian exporting countries that compete with Japan such as South Korea, Taiwan or China may lose their competitiveness as their currencies strengthen against the yen.
Friday's sharp losses in South Korean shares were due to foreign selling, with investors wary of prolonged tensions on the Korean peninsula and further weakness in the yen.
The yen's decline comes after years of a yen strength during which Tokyo lost its competitive edge against other Asian exporters, throwing the economy into deep deflation and slump.
Traders and analysts expect the yen to remain weak even if the U.S. dollar comes under pressure from signs of slowing growth. Risk assets were also seen supported by continued monetary stimulus from the world's major central banks.
U.S. crude inched down 0.2 percent to $93.11 a barrel while Brent inched up 0.1 percent to $106.40.
