The central bank tightened liquidity by withdrawing cash from the system for the third time in two weeks on Thursday. Analysts attribute the measure to rising home prices, hot money flowing into banks and the fact that recent data shows strength returning to the economy, which could be giving the PBOC more room to tighten.
"Asia is being dictated by China and moves in money markets and equities. Money markets could feasibly continue to move higher in the short term, but I've full faith the PBOC will have an upper limit in mind where it will provide the necessary liquidity to interbank markets, however for now the markets seem more sanguine ahead of the weekend," said Chris Weston, market strategist at IG.
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Nikkei 2.7% lower
Japan's benchmark index widened losses after the yen rose to 97 per dollar, experiencing its biggest one-day fall in over two months. Meanwhile, the nationwide core consumer price index (CPI) climbed 0.7 percent in September from a year earlier, in line with expectations.
"You're seeing food and energy price inflation, wage deflation and consumer durable goods deflation. It's the worst possible inflation for getting a sustained recovery because it makes the consumer feel bad," said Paul Donovan, managing director and deputy head of global economics at UBS.
(Read more: Authors accuse Apple of destroying Japan's techs)
In earnings news, Apple component maker Murata Manufacturing ended 2.2 percent higher following an earlier 6 percent spike after raising its operating profit forecast. Mitsubishi Motors rose over 1 percent after revising up its profit forecast but Canon fell 1.6 percent after cutting its profit outlook.
Shanghai slips 1.4%
The mainland's benchmark index fell below 2,150 points to its lowest level since September 6 as investors largely ignored news that the central bank will launcha new benchmark lending rate.