Japanese stocks dropped on Wednesday morning after the dollar eased against the yen on weak US economic data, while financials stocks underperformed hit by lower US yields.

The Nikkei shares average fell 0.5 per cent to 19,817.68 in mid-morning trade.

The dollar skidded 0.5 per cent to one-week lows against its perceived safe-haven Japanese counterpart and last stood at 112.56 yen.

US housing starts dropped 2.6 per cent to a seasonally adjusted annual rate of 1.17 million units, the lowest since November.

The market's mood was further dampened by weakening confidence over the US president's ability to push through tax reforms and stimulus programmes investors had been hopeful for since his election in November.

President Donald Trump asked his now-dismissed FBI Director James Comey to end the agency's investigation into ties between former White House national security adviser Michael Flynn and Russia, according to a source who had seen a memo written by Comey.

“We still can't say clearly that this Trump's case is a serious risk to the stock market yet. But people are watching if it leads to more serious problems such as a difficulty for him to push through his tax reforms and fiscal policy,” said Takuya Takahashi, a strategist at Daiwa Securities.

Financial stocks such as insurers and banks - that earn profits from investing in higher-yielding products - tumbled after US Treasury yields fell as low as 2.31 per cent overnight.

Dai-ichi Life Holdings stumbled 4.0 per cent, Sompo Holdings dropped 1.8 per cent, while Mizuho Financial Group languished 2.4 per cent.

Domestic-demand-sensitive stocks, such as utility and food shares, gained as investors stayed defensive. Tokyo Gas climbed 2.3 per cent, and Ajinomoto and Japan Tobacco both rose 1.3 per cent.

The broader Topix shed 0.4 per cent to 1,577.34 and the JPX-Nikkei Index 400 declined 0.5 per cent to 14,073.42.

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