Nikkei Closes Down 3%; Asia Mixed

Japan's stock market went on another wild ride on Monday as the benchmark Nikkei index tumbled as much as 4 percent before paring losses in a third day of volatile trade.

Losses were underpinned by uncertainty in the Japanese government bond (JGB) market, where yields on the benchmark 10-year note last traded at 0.83 percent after spiking to 1 percent last week, their highest level in a year.

"We think it's time to be really cautious and possibly get short. At around 16,000 on the Nikkei, you've priced in a huge amount of whatever recovery might come but that's happened in such a short period of time that the real economy hasn't had time to catch up with monetary measures," said Kingsley Jones, Founder and CIO at Jevons Global.

"Last week was really a warning shot that money in the Nikkei is not in there for the long haul. It's ready to come out at the first sign of trouble," he added.

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The rest of Asian stock markets were mixed. Australia's S&P ASX 200 pared losses from an earlier one-month low, the Shanghai Composite was steady and South Korea's Kospi bucked regional weakness to add 0.3 percent.

Financial markets in the U.S. will be shut on Monday for the Memorial Day holiday.

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Nikkei Closes Below 14,200

Minutes from April's Bank of Japan (BOJ) meeting revealed that some board members were eyeing steps to improve JGB liquidity back in late April.

There is some talk in markets as to whether the attempts to anchor bond yields will push the yen higher. The currency traded at 101 per dollar, well-off last week's four-and-a-half-year low of 103.

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"It's quite normal to expect 10-year JGB yields by the end of this year moving up to 1.5 percent," said Bob Parker, Senior Advisor, Credit Suisse.

Parker dismissed the significance of the bond market sell-off, saying that the BOJ has overtaken banks as the biggest buyer of JGBs and will provide further support to the market.

Manufacturers suffered the brunt of the Nikkei's losses with Nisshin Steel down 10 percent and machinery maker NSK falling 9.6 percent.

Sydney Down 0.5%

Australia's benchmark index pared losses after tanking as much as 1 percent to hit a one-month low earlier in the session at 4,931 points.

Resource stocks were some of the biggest losers on the index after Shanghai steel futures posted their second weekly loss. Gindalbie Metals tanked 7.7 percent, while Western Areas closed down 7 percent.

Retailer David Jones slumped as much as 4 percent after its third quarter total sales fell over 2 percent as a warm start to winter hurt sales.

The Australian dollar traded within range of last week's one-year low of $.095. Experts warn of the pressure in the yield trade if the currency continues to slide.

"If the dollar does fall back to 90 cents as is appears to be, international clients will start to lose out on the differentials. The profits in the banks are particularly glaring, and repatriation is key for international investors. Losing out in the currency pairs would see the shine in the trade tarnished," said Evan Lucas, market strategist, IG.

Shanghai Up 0.2%

Mainland markets were weighed down by weakness in real estate developers as rumors grows that the government may expand property tightening measures.

Gemdale and Vanke slipped 1 percent each. Recent property curbing measures such as higher down-payments have not yet succeeded in cooling rising home prices.

Kospi Up 0.3%

Technology stocks helped Seoul's index outperform Asian peers and come off Friday's nine-day low of 1,961 points.

Electronics firm Daewoo and KP surged 15 percent each as optimism about the outlook for retail sales grew on news that South Korea's key consumer sentiment measure rose in May, according to a central bank survey.

By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC