Nikkei leads Asia lower by over 2% as yen rises

Japan's benchmark index dropped over 2 percent on Thursday while the tone in the rest of Asian stocks was subdued as traders try to gauge when the U.S. Federal Reserve will start tapering its stimulus program.

Japan's Nikkei retreated from the previous day's one-week high, the Shanghai Composite eased nearly 1 percent and Australia's S&P ASX 200 was flat. Financial markets in South Korea were shut for a public holiday.

"Asian equities are mostly weaker in the absence of event risk drivers, as investors weigh the possibility of September tapering. As a result there is consolidation in most Asian bourses apart from Japan's Nikkei," wrote Stan Shamu, market strategist, IG in a note.

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Dow slumps

The handover from Wall Street overnight was weak with the Dow Jones Industrial Average closing at its lowest level in over a month. Traders have been expecting the Fed to start reducing its $85 billion in monthly bond purchases in September.

On Wednesday, St. Louis Fed President James Bullard said the central bank needs to see more data in the second half of the year before it starts to cut back on its stimulus and that if it tapers while inflation is too low, it risks deflation.

Nikkei skids 2.1%

Japan's benchmark index widened its losses after dollar-yen rose to a session low of 97.56 following comments from Japanese ministers that downplayed the idea of corporate tax cuts. Earlier this week, the Nikkei newspaper reported that Tokyo may be considering cutting corporate tax rates to offset the impact of a consumption sales tax hike.

The stronger Japanese yen weighed on manufacturers, pushing the Nikkei off the previous day's one-week high. Electronic component maker Taiyo Yuden declined over 4 percent while Panasonic and Suzuki Motor lost over 3 percent each.

(Read more: Japan's foreign bond binge hits three-year high)

Camera maker Nikon bucked the trend to rally 2 percent on reports that it is planning to develop stem cell technologies with the Riken research institute.

Social gaming giant Gree surged nearly 13 percent after reporting better-than-expected quarterly earnings.

Shanghai below 2,100

China's benchmark stock index swung between gains and losses in choppy trade after breaking a four-day winning streak in the previous session.

Drugmakers fell after the official Xinhua news agency reported that Beijing is intensifying its bribery investigation in the sector. Beijing Tiantan Bio skidded over 5 percent while Shenzhen Neptunus and Shandong Lukang lost over 2 percent each.

Railway stocks were in focus with Daqin Railway leading gains by 7.8 percent on media reports that Beijing plans to announce investment plans for the industry by the end of 2013.

July foreign direct investment (FDI) data is due later today for a check-up on the health of the world's second-largest economy. FDI in June spiked 20 percent from a year ago and if overseas investors continue to remain optimistic this month, economic sentiment in the mainland is set to rise further.

(Read more: China's rebound could stall once this quarter is over)

Sydney 0.1% lower

Caution over earnings weighed on Australia's benchmark index but a rise in metal prices boosted miners and capped heavier losses on the index.

Perseus Mining increased 14 percent, Newcrest Mining rose 1.6 percent and BHP Billiton added over 1 percent on the back of higher copper and gold rices.

(Read more: Demand for physical gold surges)

In earnings news, wealth management firm AMP Capital increased 3.7 percent after reporting a smaller-than-expected 10-percent decline in first-half earnings. But supermarket retailer Wesfarmers fell 1.8 percent despite posting a 6 percent rise in full-year net profit.

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