Nikkei drops below 15,000, closes out January with 8.5% loss
Japanese shares fell on the final trading day of the month while the rest of Asian markets were little changed despite a rally on Wall Street.
Trading volumes were thin due to the Chinese New Year holidays. Shanghai, Hong Kong and South Korean markets were closed and will resume trade next week.
For the month of January, the Nikkei was Asia's worst performing index with losses exceeding 8 percent, its worst monthly performance since 2012. The Shanghai Composite fell 4 percent for the month while Australia and South Korea lost over 3 percent each.
U.S. gains overnight were unable to lift sentiment. The S&P 500 closed 1 percent higher, while the Nasdaq shot up nearly 2 percent after data showed the economy expanded an annual 3.2 percent in the fourth quarter, with consumer spending rising 3.3 percent.
(Read more: As goes January ... so expect a volatile year)
Nikkei closes down 0.6%
Japan's benchmark index closed below 15,000 points due to a strengthening yen. The currency reversed losses to rise to 102.4 per dollar and hit an eight-week high of 138.9 against the euro.
A Reuters poll that showed Japanese fund managers trimmed their exposure to domestic equities in January due to high valuations may be weighing on sentiment.
Earlier in the session, the index rose after after the latest data indicated the economy was making progress to beating deflation. December consumer prices beat expectations to rise an annual 1.3 percent, the fastest pace in over five years. Meanwhile, industrial output rebounded following a decline in November but household spending missed estimates.
"We are coming up to a key stage for Abenomics, and the combination of rising inflation and stagnant wages is not a good one at all and we are going to need to see more companies raise wages over the coming months," said Chris Weston, chief market strategist at IG in a note.
(Read more: Japan's inflation uptick puts 2% target in sight)
In earnings news, NEC surged 11 percent after its April-December operating profit beat expectations. The world's third-largest tobacco company Japan Tobacco increased 5.6 percent after posting a 29 percent rise in October-December earnings.
Sharp tanked 2 percent following an earlier 6 percent rally after the Nikkei reported the firm's operating profit for the year ending March may top estimates.
Australia's benchmark S&P ASX 200 index managed to close above the flatline following a choppy session after fourth-quarter producer inflation came in weaker than expected.
Coal shares rose despite coal shipping ports in the northeast remaining closed after a cyclone hit early on Friday. New Hope rose over 2 percent while Whitehaven added 1.4 percent.
Medusa Mining slumped 10 percent after reporting lower gold production in the latest quarter.
Department store chain David Jones rallied 4 percent on news of a potential merger proposal with rival Myer. Shares of the latter fell 1.5 percent.
Emerging markets inch up
Indian shares closed flat while Thailand's benchmark SET Index rose 0.8 percent.
— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC