Nikkei sells off on fresh yen strength; rest of Asia closes up

Japanese stocks sold off in a mostly positive Asian session on Tuesday, dragged by fresh strength in the yen after a local media report suggested the government's highly anticipated stimulus package may not live up to expectations.

Other Asian markets retraced early losses, shrugging off declines in U.S. stocks after lower oil prices weighed on the energy sector on Monday.

The benchmark Nikkei 225 (Nihon Keizai Shinbun: .N225) closed down 237.25 points, or 1.43 percent, at 16,383.04, while the Topix (Exchange: .SPTPXN) dropped 18.42 points, or 1.39 percent, to 1,306.94.

Across the Korean Strait, the Kospi (Korea Stock Exchange: .KS11) closed up 15.02 points, or 0.75 percent, at 2,027.34. Down Under, the ASX 200 (ASX: .AXJO) closed near flat at 5,537.50, despite a 1.45 percent decline in the energy sector.

In Hong Kong, the Hang Seng index (Hong Kong Stock Exchange: .HSI) traded up 0.82 percent in late-afternoon trading, reversing earlier losses of 0.32 percent. Chinese mainland shares gained, with the Shanghai (Shanghai Stock Exchange: .SSEC) composite closing up 34.35 points, or 1.14 percent, at 3,050.18, and the Shenzhen (Dow Jones Global Indexes: .DJSZ) composite was higher by 25.14 points, or 1.24 percent, to 2,044.96.

In Japan, the Nikkei business daily reported Prime Minister Shinzo Abe's government was looking to inject 6 trillion yen ($56.7 billion) in direct fiscal outlays into the economy over the next few years. The amount was double than what was initially planned, the Nikkei said, adding it would be announced as early as August 2.

The fiscal stimulus package will be funded through a supplementary budget, the fiscal 2017 spending plan and other lending facilities, the Nikkei reported. The supplementary budget for fiscal 2016 will likely provide around 2 trillion yen, including 1.3 trillion yen or so for public works, said the Nikkei.

But that may have disappointed a market looking for as much as 10 trillion to 20 trillion yen in fiscal stimulus.

"If [the 6 trillion yen stimulus package] is the final outcome, and there are a number of permutations to be deciphered, including how the new spending as a portion of the total, markets will rightly be disappointed," said Patrick Bennett at CIBC Capital Markets.

Others said the lack of a large fiscal stimulus will see limited impact from any monetary policy expansion that the Bank of Japan (Tokyo Stock Exchange: 8301.T-JP) (BOJ) might undertake when it meets later this week.

"It seems the 10 trillion yen fiscal stimulus was a mirage," said Takuji Okubo, principal and chief economist at Japan Macro Advisors. "The BOJ is likely to stop short of implementing drastic easing measures this Friday."

The Japanese currency jumped, with the dollar/yen (: OSEJPY=) pair trading at 104.12, down from levels above 107 last week.

Japanese export stocks came under pressure, with Toyota (Tokyo Stock Exchange: 7203.T-JP) shares closing down 2.51 percent, Nissan (Tokyo Stock Exchange: 7201.T-JP) down 2.33 percent, and Canon (Tokyo Stock Exchange: 7751.T-JP) shares off 2.79 percent.

South Korean shares likely received a boost from better-than-expected growth print for the second quarter .

Data released by the South Korean central bank showed the country's real gross domestic product (GDP) grew by 0.7 percent on-quarter in the second quarter of 2016, in line with a Reuters poll.

Private consumption, expenditure in construction investment, facilities investment and intellectual property products investment increased. Production in manufacturing, construction and services rose.

On-year second quarter GDP growth was 3.2 percent, compared with market expectation for a 2.9 percent increase.

ANZ analysts said the uptick in growth is "more of a statistical rebound from a weak Q1 than a genuine recovery in domestic demand."

"We believe that the 3.2 percent year-on-year growth print for Q2 is likely to represent the high point of 2016 growth, with corporate debt restructuring to weigh heavily on the economy in H2 2016 and a more material slowing in growth to make itself evident in the coming quarters," said Glenn Maguire and Eugenia Victorino from ANZ.

Oil prices dropped more than 2 percent on Monday on renewed oversupply concerns. Reuters reported data from market intelligence firm Genscape pointed to an inventory rise of 1.1 million barrels at the Cushing, Oklahoma, delivery point for U.S. crude futures in the week to July 22.

During Asian hours, oil prices recovered modestly, with U.S. crude up 0.07 percent at $43.16, after dropping by more than $1 on Monday, while global benchmark Brent added 0.22 percent to $44.82, after a 2.12 percent drop overnight.

Energy plays in Asia Pacific sold off, with shares of Santos (ASX: STO-AU) closing down 2.36 percent, Woodside Petroleum (ASX: WPL-AU) lower by 0.84 percent, Japan's Inpex (Tokyo Stock Exchange: 1605.T-JP) down 3.27 percent and Cosmo Energy off 5.05 percent.

On the earnings front, Japanese consumer electronics maker Canon (Tokyo Stock Exchange: 7751.T-JP) released its earnings after market close. The camera and printer maker said for the quarter through June, operating profit fell 35 percent on-year to 68.6 billion yen, missing the 81.9 billion yen average of five analyst estimates, according to Reuters.

Canon also cut its forecast for group operating profit for the year through December, from 300 billion yen to 265 billion yen, said Reuters.

South Korean automaker Hyundai Motor (Korea Stock Exchange: 538-KR) also announced earnings, where the company said its second quarter net profit was at 1.66 trillion won, compared to 1.7 trillion won a year ago, said Reuters. Hyundai shares closed up 0.37 percent.

Shares of memory chip maker SK Hynix (Korea Stock Exchange: 66-KR) dropped 1.38 percent, after Reuters reported the company's April-June profit was 453 billion won ($397 million), the lowest since the first quarter of 2013 and matching analysts' estimates from a Thomson Reuters survey.

Reuters reported that SK Hynix said its second quarter shipments of DRAM chips, that are used to temporarily store data, rose 18 percent on-quarter while average selling prices fell 11 percent. Shipments for long-term data storage chips for computers and smart devices, called NAND chips, climbed 52 percent while average selling price dropped 11 percent, said Reuters.

In the currency market, the dollar traded lower against a basket of currencies, with the dollar index (New York Board of Trade (Futures): =USD) down 0.27 percent at 97.022 in late Asian trade.

Stateside, the Federal Reserve Open Committee is set to begin its two-day monetary policy meeting on Tuesday.

The Dow Jones industrial average (Dow Jones Global Indexes: .DJI) closed down 77.79 points, or 0.42 percent, at 18,493.06. The S&P 500 index (INDEX: .SPX) finished down 6.55 points, or 0.3 percent, at 2,168.48, while the Nasdaq (NASDAQ: .IXIC) composite ended 2.53 points, or 0.05 percent, lower at 5,097.63.

— Reuters contributed to this report.

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