Japan closes at new four-week low as yen strengthens

Asian equity markets declined across the board on Monday with Japanese stocks falling to a new four-week low on the back of a stronger currency while renewed fears of an economic slowdown in China hindered gains.

Japan's Nikkei index closed down over 3 percent at a session-low, Australia's S&P ASX 200 index was flat at 5,040 points and South Korean shares ended at a four-day low. In China, the Shanghai Composite closed at a one-week low.

(Read more: Data, central banks to dominate Asia this week)

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Cautious mood

The bearish tone in Asia was partly due to caution ahead of central bank meetings in the U.S., Europe and United Kingdom this week.

"All of them are expected to touch on the subject of forward guidance, albeit to various extents. The clarity of the symphony will determine the level of support to the risk appetite. Should any of them be more explicit (more dovish) about forward guidance, the market can be expected to react in a positive way," wrote analysts at Credit Agricole in a research note.

(Read more: Changes to Fed 'forward guidance' could lead to this)

Nikkei drops 2%

A strong currency offset positive retail sales data in Japan and led the benchmark index to close at its lowest level since July 1. Dollar-yen hit a new one-month low of 97.61 and that led to a sell-off across the export-heavy Nikkei index.

Automakers were badly hit with Mitsubishi Motors leading losses by 10 percent, Isuzu Motors dropping 8 percent and Toyota Motor lower by 4 percent. Consumer electronics maker Sharp fell 6 percent and lender Mitsubishi UFJ lost 4 percent.

Markets are bracing for a slew of corporate earnings results this week in what is being called as "one of the most important financial year reporting seasons in well over a decade," according to IG's Evan Lucas.

Investors shrugged off a 1.6 percent annual rise in retail sales data for the month of June. The figure was higher than May's 0.8 percent annual rise but still lower than a Reuters forecast for a 1.9 percent gain.

(Read more: Volatility exacerbates market suspicion in Japan)

"Looking ahead, there are a number of reasons to doubt that the recent strong run of consumer spending can continue. One is the relative weakness of the survey-based household expenditure data, where spending fell back sharply in the first two months of the second quarter after surging in the first," wrote analysts at Capital Economics in a report.

Shanghai falls 1.7%

China's benchmark index briefly fell below 1,970 points to a near three week low but managed to pare losses before the close as concerns about rising debt levels and money market rates led to a sell-off in banking stocks.

Mid-sized lenders Minsheng Banking and Pudong Development Bank lost nearly 3 percent each after the National Audit Office announced that it is conducting an audit of all government debt. Furthermore, China's seven-day benchmark repurchase rate spiked to 5 percent on Monday - well above average levels of around 3 percent.

(Read more: Credit squeeze in Asia now worst since financial crisis)

Disappointing data over the weekend also weighed on sentiment. Profits of Chinese industrial companies rose an annual 6.3 percent in June, much lower than May's 15.5 percent reading. The weak figures follow HSBC's flash purchasing managers index, which showed manufacturing activity slowing to an 11-month low in July.

"We believe worries of a hard landing in China are overblown because Beijing still can, and will, use some mild stimulus to put a floor under the slowdown," wrote economists at HSBC in a research note.

A rally in solar stocks lent some support to the index after Beijing and the European Commission resolved a dispute over alleged Chinese dumping of solar panels in Europe. Shenzhen Topray Solar added 10 percent, while Shanghai Chaori Solar jumped 5 percent.

Sydney flat

Australian resource stocks fell after copper prices hit a three-week low. Mount Gibson and Atlas Iron lost 2.7 and 4.7 percent, respectively.

Shares of miner Oz Minerals fell 2 percent after forecasting a write-down of $185 million to first-half profit as a result of falling commodity prices.

But gains in banking stocks capped heavier losses on the index. Westpac led gains by 1 percent as optimism grew for an interest-rate cut at next week's Reserve Bank of Australia (RBA) policy review.

"The market is currently pricing a 78 percent chance of a rate cut early in August and all focus will be on any policy related comments at RBA Governor Glen Stevens's speech on Tuesday," wrote analysts at National Australia Bank in a report.

Kospi slips 0.6%

South Korea's benchmark index closed at its lowest level in four sessions thanks to a a 1.5 percent fall in market heavyweight Samsung Electronics.

Sentiment was also hurt after data from the Bank of Korea showed that domestic manufactures were more pessimistic about the outlook for August than they were for July.

In earnings news, Lotte Chemical tanked 3 percent despite reporting a rise in second-quarter profit after last year's net loss.

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