By Chikako Mogi
TOKYO (Reuters) - Japanese equities plunged to two-month lows on Friday, with the yen rising against the dollar as investors fretted over U.S. jobs data due later, while constant market agonizing about the Federal Reserve's stimulus plans drove Asian shares to fresh 2013 lows.
The Nikkei average <.n225> shed as much as 2.8 percent and entered bear market territory earlier, having lost 20 percent from a 5-1/2 year high reached two weeks ago. The Nikkei ended down 0.2 percent, closing at its worst week in over two years. <.t></.t></.n225>
Worries the U.S. nonfarm payrolls will undershoot expectations prompted investors to cut long positions that had been profitable for months, particularly those betting on the dollar to rise against the yen as the U.S. economy recovers, and those buying Japanese stocks on hopes a weaker yen will underpin the Nikkei.
Asian shares failed to capitalize on an overnight gain in Wall Street as investors sought to square their positions before the payrolls data. The job numbers may shed new light on whether the Fed is likely to taper its $85 billion a month stimulus program in coming weeks.
MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> fell 0.8 percent to its lowest since late November, putting it on course for its worst week in more than a year with a 3.2 percent decline.</.miapj0000pus>
Frances Cheung, Credit Agricole CIB's senior strategist in Hong Kong said the Fed uncertainty was making investors extremely nervous. "There is divergence across asset classes. It's really difficult to pin down the impact."
European stock markets are likely to edge higher, with financial spreadbetters predicting London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> will open up around 0.6 percent. A 0.1 percent drop in U.S. stock futures pointed to cautious Wall Street start. <.l><.eu><.n></.n></.eu></.l></.gdaxi></.fchi></.ftse>
Australian shares <.axjo> hit a 4-1/2-month low while South Korean shares <.ks11> slid 1.8 percent, pulled down by a tumble in heavyweight Samsung Electronics . Chinese shares also fell.</.ks11></.axjo>
After falling 2 yen from session highs to a two-month low of 95.55 yen, giving up all gains made since the Bank of Japan's unprecedented stimulus unveiled on April 4, the dollar crawled back up to trade around 96.35 yen. It was down 0.15 percent <.dxy> against a basket of six major currencies, holding above its lowest since February 25 of 81.077 hit on Thursday.</.dxy>
BLAME RISING YIELDS
Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said market players may be shifting their focus to higher bond yields. U.S. bond yields are rising and prices are falling on speculation about an eventual unwinding of the U.S. stimulus, while Japan's bold monetary stimulus has helped eased appetite for safe-haven German bonds. Japanese government bond yields have also faced upward pressures.
"Recent yield increases has brought about an unintentional tightening environment, lessening the degree of effectiveness from monetary stimulus provided by major central banks. This may be starting to unnerve markets," Hattori said.
European Central Bank President Mario Draghi said on Thursday further monetary support was unlikely in the near future, noting that the ECB was technically ready for negative deposit rates but there was no reason to act right now.
Corrections have been far deeper for Japanese stocks and the yen as the Nikkei had surged over 80 percent from mid-November to last month's peak while the yen had slumped 30 percent against the dollar in the same period, when speculators boosted their bets that Prime Minister Shinzo Abe will pursue strong reflationary policies.
Market turmoil accelerated and then crushed Japanese stocks as "Abenomics" - monetary easing, fiscal spending and growth strategies - failed to live up to blown-out market expectations, triggering a wave of yen selling and Nikkei buying, all weighing on broader Asian bourses.
"It's not what Abe has announced that I am skeptical about. It's the way that policy is being directed and executed. It's the fact that Abe's 'three arrow' policies have been directed more towards changing expectations than reality," said Robert Rennie, head of currency strategy at Westpac, in a note.
U.S. crude futures steadied at $94.83 a barrel while Brent was up 0.1 percent to $103.71.
"Investors should look at dollar trades more than supply-demand factors for oil," said Tetsu Emori, a commodity fund manager with Astmax Investments in Tokyo.
"In the long-term I agree that the dollar will strengthen as the Fed rolls back stimulus, but for now the dollar seems overbought and we are seeing some unwinding of positions."
(Additional reporting by Manash Goswami; in Singapore; Editing by Eric Meijer)