Tensions between the two countries escalated on Thursday after Seoul said it was cancelling an intelligence-sharing pact with Tokyo amid a bitter trade dispute. The arrangement was designed to share information on the threat posed by North Korea and its missile and nuclear activities.
Japan's Defense Minister Takeshi Iwaya said Friday South Korea's decision showed it failed to appreciate the growing security threat posed by Pyongyang's missile activities.
Defense names in Japan and South Korea mostly rose steadily through the day to end higher by the close. In Japan, shares of Kawasaki Heavy Industries rose 0.69%, Fujitsu was up 1.25% and Mitsubishi Electric added 1.62%. South Korean defense stocks pared early gains but were mostly positive: Speco was up 0.17%, Victek jumped 8.49% in early trade, and Hanwha Aerospace gained about 2%.
The South Korean won weakened further to 1,209.64 against the greenback, from around the 1,202 level reached midweek.
Elsewhere, mainland Chinese shares traded mostly higher: the Shanghai composite gained 0.49% to close at 2,897.43, while the Shenzhen composite was flat, closing at 1,578.70. The Shenzhen component gained 0.13% to 9,362.55.
Overall, MSCI's broadest index of Asia-Pacific shares outside Japan went up 0.37%.
Fed's Powell is set to deliver a speech at a yearly central banking symposium in Jackson Hole, Wyoming. Investors will look for clues about what the U.S. central bank would do next. Analysts say markets have fully priced in a possible rate cut in September. Fed cut rates by 25 basis points in July, citing "global developments" and "muted inflation."
"Interest in the Powell speech will be in whether he maintains the line that last months' action represented no more than a "mid-cycle" adjustment or "insurance" cut," Ray Attrill, head of foreign exchange strategy at the National Australia Bank, said in a morning note.
"We presume Powell will want to convey an open-minded view about the outlook for monetary (policy) from here without pre-committing to any set course, but whether he will be suitably dovish enough for the market will be key to the market reaction," Attrill added.
Still, comments from other Fed officials about how certain a September rate cut was has dampened investor confidence.
The U.S. dollar last traded at 98.334 against a basket of its peers, jumping from an earlier session low of 98.181.
The onshore yuan dipped to a fresh low since 2008, trading at 7.0930 per dollar in the afternoon, while the offshore exchange rate was at 7.0902. Earlier, before the Chinese markets opened, the People's Bank of China set the yuan mid-point rate at 7.0572 per dollar, slightly stronger than what a Reuters poll had estimated. The central bank allows the on-shore yuan to trade in a narrow band of 2% up or down from the daily midpoint fix.
Investor sentiment remained cautious as the trade war between Beijing and Washington continues. On Thursday, China threatened 'countermeasures' against new U.S. tariffs on Chinese goods, but did not provide details on how it will respond.
Oil prices traded slightly higher Friday during Asian hours after overnight declines, which some analysts attributed to weak economic data and ongoing worries about the health of the global economy as recession fears linger.
"Sentiment wasn't helped after some Fed speakers voiced their opposition to further rate hikes," David Plank from ANZ Research said in a morning note. "The market took little comfort from ongoing supply constraints."