TOKYO Asian shares fell on Wednesday as cautious investors waited for crucial economic data from China later this week, while the yen's extended gains spurred profit taking in Japanese equities after their recent rally.
Japan's benchmark Nikkei average shed 2.6 percent for its largest daily decline in eight months, sharply reversing Tuesday's rally that lifted the index to a 32-month closing high, as the yen paused from its recent heavy selling and extended gains for two days in a row.
The weak yen has been a catalyst for the Nikkei's 24 percent gain over the past two months.
"It's a correction. Some exporters' gains are legitimate, but others aren't, so I am selling exporters which have gained while their fundamentals are still poor such as Panasonic," said Makoto Kikuchi, Chief Executive of Myojo Asset Management in Tokyo.
Many other markets which had rallied opted to trim long positions ahead of a slew of reports due on Friday from China, the world's second-largest economy and top consumer of most commodities.
The MSCI's broadest index of Asia-Pacific shares outside Japan wiped out earlier modest gains to fall 0.4 percent, dragged lower by a 1.5 percent drop in the index's worst performer, Shanghai shares. Hong Kong shares shed 0.6 percent.
Bucking the risk-off trend, Australian shares and Brent futures gained, encouraged by Tuesday's stronger-than-expected U.S. retail sales data in December.
European markets are seen rising modestly, with financial spread-betters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX would open up as much as 0.3 percent. A 0.2 percent fall in U.S. stock futures hinted at a weak start on Wall Street.
Data showing China's foreign direct investment inflows falling by a smaller percentage in December than the month before helped trim losses in Chinese stocks, ahead of fourth-quarter GDP and December industrial output, retail sales and house price data expected on Friday.
The data from China will be keenly watched by investors for clues on the health of the Asia's biggest economy and global growth prospects.
Being Asia's sole outperformer, Australian shares advanced 0.5 percent, led by banks and defensives after Wall Street posted modest gains on the retail sales data.
"It would appear that a number of traders are waiting to see how Friday's Chinese GDP data pans out before buying with more conviction and this is particularly true of the mining sector," said Tim Waterer, senior trader at CMC Markets in Sydney.
Selling in the dollar and the euro against the yen in what traders say is a short-term corrective move was sparked by a Japanese official on Tuesday warning of damage from excessive yen weakness through rising import prices.
The yen had steadily fallen over the past two months on expectations the new government would embark on aggressive fiscal stimulus while pushing the Bank of Japan to take bold monetary easing steps.
Data on Wednesday showed Japan's core machinery orders rose 3.9 percent in November from October, exceeding a forecast 0.3 percent rise, but another report showed consumer confidence worsened in December.
The dollar fell 0.7 percent to 88.13 yen, after scaling its peak since June 2010 of 89.67 on Monday.
The euro slumped 0.9 percent to 117.09 yen, after surging to its highest since May 2011 of 120.13 yen on Monday.
The euro eased 0.2 percent against the dollar to $1.3281, after reaching an 11-month high of $1.3404 on Monday.
The euro was pressured by a weak economic report from Germany as well as comments from the chairman of the euro zone finance ministers, Jean-Claude Juncker, who on Tuesday said the euro was "dangerously high" without elaborating.
The single currency eased 0.1 percent against the Swiss franc at 1.2385, off Tuesday's 13-month high of 1.2413 francs. The Swiss franc has been hit by receding safe-haven bids as falling yields in deeply indebted countries such as Spain and Italy eased concerns about the euro zone's debt crisis.
Reversals in the strengthening trend for the Swiss franc and the yen may suggest asset reallocations are taking place.
"Old regimes are dying and FX is the first sign of this process. We are seeing this in JPY, are starting to see this in CHF," Sebastien Galy, strategist at Societe Generale, said in a note to clients.
Spot gold rose 0.2 percent to $1,681.55 an ounce, underpinned by wariness about U.S. default risks.
But platinum fell 0.7 percent to $1,666.75 an ounce after hitting a three-month high of $1,699.50 on Tuesday on supply fears. It traded at a premium to gold on Tuesday for the first time since March 2012.
The benchmark gold futures contract on the Tokyo Commodity Exchange hit a record high for a third consecutive session, rising to 4,828 yen a gram.
U.S. crude was up 0.2 percent to $93.44 a barrel while Brent was up 0.3 percent to $110.61.
A falling stock market weighed on Asian credit markets, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 2 basis points.
(Additional reporting by Ayai Tomisawa in Tokyo and Thuy Ong in Sydney; Editing by Shri Navaratnam)