TOKYO (Reuters) - Japanese stocks skid to two-month lows on Tuesday as heightened concerns about the health of the world economy unnerved investors, triggering a shift in funds to safe-havens such as U.S. bonds.
Japan's Nikkei share average fell 1.5 percent, hitting levels last seen in mid-August, while the 10-year U.S. debt yield hit a 16-month low of 2.238 percent following a market holiday on Monday.
MSCI's broadest index of Asia-Pacific shares outside Japan, which had fallen more than 10 percent since early September, managed to nudge up 1.0 percent thanks to bargain-hunting but was still within sight of its 6 1/2-month low hit on Monday.
"There are downside risks to the global economy on the whole. And the G20 meeting last weekend showed there is no panacea to lift the economy," said Hirokazu Kabeya, senior strategist at Daiwa Securities.
The specter of a possible recession in Europe, a slowdown in China and sluggish growth in Japan have prompted investors to pull some of their money out of equities ahead of the earnings seasons in the U.S. and elsewhere.
The U.S. Federal Reserve is expected to wind up its bond buying scheme later this month - another reason for investors to be cautious on stocks as the completion of the Fed's two previous quantitative easing programs triggered a major correction in Wall Street shares.
U.S. S&P 500 fell 1.7 percent on Monday to five-month low, posting its worst three-day slide since November 2011 while European shares hit a seven-month intraday low.
The volatility index rose to 24.6 percent, the highest level since June 2012, when the world's financial markets were rattled by the European sovereign debt crisis, encouraging investors to flock to the safety of government debt.
"The fall in U.S. bond yields reflects a worsening global economic outlook, notably in Germany. But considering that the Fed is still planning to raise interest rates in the future, bond yields can yield only so much," said Tomoaki Shishido, fixed income strategist at Nomura Securities.
After a run of weak data from Germany, investors are now braced for the ZEW economic sentiment index later in the day, which is expected to fall to a two-year low.
The U.S. dollar stumbled after a months-long rally as concerns over the global growth outlook undermined the case for an earlier start to the Fed's rate-tightening cycle.
Fed Vice Chairman Stanley Fischer said on Saturday that the global outlook might hamper the effort to normalize U.S. monetary policy after years of extraordinary stimulus.
The dollar index stood at 85.347, off a four-year high of 86.746 hit earlier this month.
The euro traded at $1.2716 while the yen stood at 107.10 per dollar.
Oil prices flirted with four-year lows, weighed by global demand concerns and by signals from key Middle East producers that they plan to keep output high despite the latest shakeout in prices.
Kuwait said OPEC was unlikely to cut production to support prices, while Saudi Arabia has privately told oil market participants it could be comfortable with $80 per barrel.
© Reuters. A woman holding a parasol stands as passers-by walk past an electronic board showing Japan's Nikkei average, outside a brokerage in Tokyo
Brent oil futures traded at $88.23 per barrel, not far from a four-year low $87.74 hit on Monday.
(Editing by Shri Navaratnam and Eric Meijer)
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