Japan's Nikkei drops as escalation in Middle East hits risk sentiment

Japan's Nikkei share average edged lower on Wednesday, after escalating tensions in the Middle East left investors with little appetite for riskier assets as markets awaited further developments.

The Nikkei .N225 slid 1.6 per cent to 38,013.76 by the midday break, while the broader Topix .TOPX was down 0.79 per cent at 2,669.63.

Iran launched ballistic missiles on Tuesday, spurring vows from Israeli Prime Minister Benjamin Netanyahu that its arch foe would pay for the attack. Tehran said any retaliation would be met with "vast destruction", raising fears of a wider war.

"The escalation in the Middle East has resulted in a classic risk-off reaction, posing headwinds for broader Japanese equities," said Charu Chanana, global market strategist and head of forex strategy at Saxo.

Japanese technology shares led losses, following their US peers lower after a near 3 per cent drop on the Philadelphia SE Semiconductor index .SOX overnight.

Wall Street's three main stock indexes also ended lower on Tuesday, with the Nasdaq losing more than 1 per cent, as a risk-off mood spread following news of Iran's attack. .N

Tokyo Electron 8035.T slipped 2.76 per cent, Advantest 6857.T fell 3.7 per cent, and SoftBank Group 9984.T was down 1.64 per cent.

Outside of tech, Uniqlo parent firm Fast Retailing 9983.T shed 3.22 per cent to weigh the heaviest on the Nikkei , among 155 of the index's 225 constituents in the red.

Defence-related stocks were among the shares to gain following the news. Kawasaki Heavy Industries 7012.T rose 1.62 per cent, after rallying in the previous session on bets that the sector would benefit from the new Ishiba administration.

Inpex 1605.T, up 4.97 per cent, and other energy shares also rose, buoyed by a jump in oil prices on fears that the Middle East conflict could disrupt supply.

Oil and coal producers .IPETE.T were among the best performers by sector, climbing about 3 per cent, just behind miners .IMING.T, which advanced 4.86 per cent.