Nikkei Hits 3-Week Low After Tankan Disappoints

Nyshka Chandran, News Assistant

Risk appetite in Asia was dampened on Monday after economic data for the region's two largest economies came in below expectations, while overall trading volume remained subdued given the closure of some markets for the Easter holidays.

The Nikkei 225 slumped 2 percent to a three-week low, Seoul's Kospi eased from a previous three-week high and the Shanghai Composite sat near its lowest levels since the start of the year.

Markets in Australia, Hong Kong and most of Europe are shutfor the Easter holidays while U.S stocks are set to resume trade on Monday.

Doubts over China's economic recovery emerged after the nation's official purchasing managers index (PMI) for March missed market expectations.

"It (the PMI data) is telling you that the economy is not rip-roaring ahead. If you look at the tone and language from the new administration, they want more emphasis on the private sector, which means a squeeze in profits and economic growth," said Mark Matthews of Bank Julius Baer on CNBC's "The Call."

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Investors have now turned their attention to the Bank of Japan's highly-anticipated policy meeting on Tuesday. Central bank chief Haruhiko Kuroda is expected to come out with guns blazing as investors await drastic stimulus measures such as longer-term government bond purchases to inflate the economy.

Improving Japan's Corporate Sentiment

Tankan in Focus

Tokyo equities closed at its lowest levels since March 8 after a negative reading of the Bank of Japan's Tankan survey revealed more pessimists than optimists among the manufacturers surveyed.

The quarterly figure came in below expectations with a reading of -8 instead of the anticipated -7 level. However, analysts say there's still reason to be optimistic.

(Read More: Why Are Japan's Manufacturers So Bearish?)

"Back in December, the same people who wrote the survey said they expected the number to be -15. It's still an improvement so we shouldn't be pessimistic about it," said Takuji Okubo of Japan Macro Advisors on "Asia Squawk Box."

Defensive stocks lost favor with drug names like Takeda Pharmaceutical and Dainippon Sumitomo Pharma easing over 5 percent.

Kospi Pares Gains

Seoul shares fell below the 2,000 mark, moving further away from Friday's three-week high of 2,013 after China's weaker-than-expected manufacturing data.

Construction stocks limited losses on reports that the government will announce a housing plan in order to boost the sluggish property sector. Byucksan Engineering and Construction jumped 15 percent while Namkwang added 7 percent.

Meanwhile, market heavyweight Samsung Electronics slipped 1 percent ahead of releasing earnings guidance later this week.

Sentiment was also hurt as tensions flared on the Korean peninsula after Pyongyang declared on Saturday that it has entered a "state of war" with Seoul.

China Is a 'Lose-Lose Proposition': Pro

Shanghai Flat

Mainland shares touched a three-month low of 2,227 earlier in the session but managed to close off lows after a rally in real estate stocks limited losses.

China's biggest cities unveiled fresh property measures over the weekend in a bid to cool overheating in the sector but stocks dismissed the news with China Merchants Property surging nearly 5 percent, and Poly Real Estate adding 3 percent.

Analysts attribute the rise to the fact that many had priced in the tightening measures after last month's property clampdown. However, some experts are wondering why the first round of curbs did not scare investors off.

"Where are you going to put your money if you're in China? You can't put int a bank account or the stock market. It's going into real estate so until there are more investment options in China, there is no safety net," said Tony Nash of IHS Global Insights.