Japan's Nikkei, benchmark bond tumble as MidEast conflict fuels stagflation fears

By Satoshi Sugiyama

TOKYO, March 30 (Reuters) - Japan's Nikkei share average fell about 5% on Monday, erasing its gains for the year in a broad selloff, while benchmark bond yields touched a 27-year high, as the widening Middle East war fuelled stagflation concerns.

The Nikkei .N225 was down 4.8% at 50,786.64 after falling as much as 5.3% earlier in the session, and was headed for its biggest monthly drop since the 2008 global financial crisis with a 13.6% plunge. The broader Topix .TOPX slid 4.5% to 3,486.86.

The benchmark 10-year JGB yield JP10YTN=JBTC rose to 2.390%, a level not seen since February 1999. It later reversed its course, falling 0.5 basis points to 2.365%. Yields move inversely to bond prices.

"The market is probably now wary not only of inflation and an economic slowdown (from the Middle East situation), but even of a recession. In other words, negative growth — not just a simple slowdown," said Shingo Ide, chief equity strategist at NLI Research Institute.

The yen traded above the key 160-per-dollar level as the month-long war in Iran weighed on investor sentiment. In a summary of opinions from the Bank of Japan's most recent policy meeting, one member said surging oil prices and a weak yen could push up inflation sharply.

Over the weekend, Yemen's Iran-aligned Houthis launched their first attacks on Israel since the start of the U.S.-Israeli war with Iran, pushing oil prices higher.

Pakistan said it was preparing to host "meaningful talks" to end the conflict with Iran in coming days, even as Tehran said it was ready to respond if the U.S. launched a ground attack.

There was one advancer on the Nikkei index against 223 decliners.

Technology investment conglomerate SoftBank Group 9984.T led the Nikkei's decline, losing 9.0%. Chip-testing equipment maker Advantest 6857.T fell 6.7%, dragging down the key gauge the most.

In the bond market, the two-year yield JP2YTN=JBTC, the one most sensitive to BOJ policy rates, decreased 1.5 bps to 1.36%. The five-year yield JP5YTN=JBTC fell 1 bp to 1.805%. The 30-year yield JP30YTN=JBTC added 4 bps to 3.740%.