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The Nikkei average .N225 fell by nearly 1 percent, weighed down by financial stocks, as investors worried about higher borrowing costs after Standard & Poor's cut Japan's credit rating by a notch for the first time since 2002.

While the MSCI index of Asian stocks outside Japan .MIAPJ00000PUS was poised to eke out meager gains for the week, thanks to a mild recovery in risk-appetite, Asian stocks have underperformed the MSCI world index .MIWD00000PUS, which has risen by 2.5 percent since the beginning of the year.

A combination of worries of frothy valuations and a steady drip of positive data out of Europe and the United States have encouraged investors to take profits in some Asian markets, particularly in those that are seen as slow in tackling inflation.

Barclays strategists said Asian authorities are not countering price pressures with sufficient tightening and inflation risks would continue to have a bearing on these markets.

Malaysia held off from raising interest rates on Thursday while the Philippines said this week the U.S. Federal Reserve's dovish stance vindicated its low rates policy.

But some other central banks in the region are stepping on the policy brakes after heavy offshore selling.

India raised interest rates by a quarter point this week, its seventh such increase in less than a year, and Indonesia signaled an aggressive approach to tackling inflation.

Both markets have borne the brunt of the recent selloff.

India's stock index .BSESN is poised to register its worst monthly performance since October 2008 and 10-year Indonesian bond yields have risen by the most since early 2009.

Corporate earnings were robust, with Samsung (005930.KS), the world's top memory chipmaker, set to show improved results, sending its shares to a record.

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Japanese government bonds advanced, taking the ratings cut in stride, as investors focused more on the country's ample savings and largely domestically held debt.

March 10-year futures opened lower, but quickly reversed losses to be up 0.20 points at 139.98 as the downgrade had largely been seen as a matter of time. On Thursday evening, it fell to as low as 139.48 immediately after the downgrade.

Ten-year yields edged lower to 1.215 percent and credit default swaps widened slightly to around 83 bps, but well below peaks of near 100 bps hit in 2010.