Nikkei extends losses to close down 2.3%

Monkeys threw a wrench into Asian markets in the Lunar New Year's first week of trading, with sharp sell-offs in Japan, Singapore, and Down Under on Wednesday.

In Australia, the S&P/ASX 200 (ASX: .AXJO) lost 56.37 points, or 1.17 percent, to close at 4,775.70, extending Tuesday's 2.88 percent drop. The market was weighed by the energy, materials and financial sectors, which shed 1.32, 1.46 and 0.71 percent respectively. The main index closed down 20.17 percent from its 52-week closing high in April 2015, pushing it into bear market territory.

Japanese shares continued to tumble, with the Nikkei 225 (Nihon Kenzai Shinbun: .N225) dropping 372.05 points, or 2.31 percent, to close at 15,713.39, following a 5.4 percent decline on Tuesday, as banking and commodities stocks continued to get hammered. The index, which has closed in the red for six of the past seven sessions, is down 24.70 percent from its 52-week high set June 2015.

Singapore's Straits Times index (Singapore Exchange: .STI), which resumed trading after being shut Monday and Tuesday for the Lunar New Year holidays at the start of the Year of the Monkey, retraced some losses to trade down 2 percent. In early trade, the index was down as much as 2.75 percent. Malaysia's market, which also reopened Wednesday, fell, with the KLCI (Kuala Lumpur Stock Exchange: .KLSE) dropping 0.73 percent, while Indonesia's Jakarta Composite (Jakarta Stock Exchange: .JKSE) was off by 0.69 percent.

Hong Kong and South Korea will resume trading on Thursday. Mainland Chinese markets and Taiwan will be closed for the week.

Singapore's DBS Bank said in a morning note that while China's markets remain closed, risk aversion is still heightened due to sell-offs in other parts of the world.

The note said, "It remains to be seen if this bout of risk aversion would have any impact on the real economy. For now, the market thinks that global growth and inflation is lacking. In addition, uncertainties on the Chinese economy weigh. The market is looking at less than one hike from the Fed this year, down from two to three hikes just six weeks ago."

The Japanese yen, which is seen as a safe-haven investment during times of market volatility, continued to strengthen, with the dollar fetching just 114.63 yen Wednesday, as the dollar-yen pair (Exchange: JPY=) tapped its lowest levels since November 2014. In its session low, the pair traded at 114.23.

Kathy Lien, managing director of FX Strategy for BK Asset Management, said in a note on Wednesday that many investors were wondering if the Bank of Japan (Tokyo Stock Exchange: 8301.T-JP) (BOJ) would intervene to halt the climb in the yen. The dollar-yen pair has fallen 700 pips in the past seven trading days and Lien said that was not because the market was optimistic on Japan's economy.

"The yen is a funding currency and (the pair) is falling hard as investors bail out of risky trades," she wrote. "[The] yen strength comes at significant costs for Japan because as an export dependent nation, many Japanese industries live and die by the value of the yen."

A stronger yen hurts corporate profitability, which in turn hurts the Japanese economy, Lien said.

Major exporters Toyota (Tokyo Stock Exchange: 7203.T-JP), Nissan (Tokyo Stock Exchange: 7201.T-JP), Honda (Tokyo Stock Exchange: 7267.T-JP) and Sony (Tokyo Stock Exchange: 6758.T-JP) finished down between 0.44 and 1.99 percent.

Shares of Sharp (Tokyo Stock Exchange: 6753.T-JP) were down 6.06 percent in morning trade. The troubled electronics maker has been at the center of competing takeover offers from Taiwan-based Hon Hai Precision Industry (Taiwan Stock Exchange: 2317-TW), better known as Foxconn, and Japanese state-backed Innovation Network Corp. of Japan (INCJ).

According to a Bloomberg News report, the state-backed fund is arguing that its proposed package of cash, asset sales and support from lenders could be worth 1 trillion yen ($8.5 billion) to Sharp, compared with Foxconn's offer of 660 billion yen, but INCJ said it wasn't increasing its offer.

Bucking the selloff, Yahama Motor (Tokyo Stock Exchange: 7272.T-JP) shares climbed 5.37 percent after tumbling more than 23 percent month-to-date. Deutsche Bank said in a note Tuesday that the stock looks oversold in a reaction to operating earnings that missed expectations and overly conservative guidance; it reiterated a Buy call and said it saw "meaningful upside" to fiscal 2016 earnings.

Japan's major trading houses were sharply lower, with Mitsubishi Corp (Tokyo Stock Exchange: 8058.T-JP) shedding 4.38 percent, Itochu Corp (Tokyo Stock Exchange: 8001.T-JP) down 4.55 percent and Sumitomo Corp (Tokyo Stock Exchange: 8053.T-JP) down 4.38 percent. They have been facing billions of dollars in impairment due to a double whammy of emerging market downturn and a global commodities rout.

Elsewhere, after market close, Japanese telecommunications and Internet company Softbank reported an 87 percent on-year drop in net profit for its fiscal third quarter, widely missing expectations. The company said its profit for the quarter fell to 2.28 billion yen ($20 million) from 18.73 billion yen a year earlier.

Shares of Softbank (Tokyo Stock Exchange: 9984.T-JP) had finished down 3.50 percent before the release of the results.

Banking stocks in Australia were swept up in the banking sell-off in Europe and the U.S., with three of Australia's so-called Big Four banks finishing in the red. NAB (ASX: NAB'A-AU), ANZ (ASX: ANZ'A-AU) and Westpac (ASX: WBC'B-AU) closed down 0.59 to 1.93 percent.

But Commonwealth Bank of Australia (ASX: CBA-AU) tacked on 1.83 percent; before the market open, the company reported a 4 percent gain in fiscal first-half cash profit, in line with expectations. Cash profit for six months ended December 31 rose to A$4.80 billion ($3.39 billion) compared with A$4.62 billion a year earlier.

Chris Weston, chief market strategist at spreadbetter IG, said in an afternoon note that though CBA proved to be the exception among the Big Four, on the back of a solid earnings result, it does little to improve investor sentiment toward the global banking sector.

He wrote, "It seems having revenue and loan growth and a very compelling yield means little when there is a solvency issue in European banks and a consistent flattening of the U.S. yield curve leading to concerns over U.S. banks margins."

"The short sellers are seeing a lack of any conviction behind the buyers and finding the most favorable short opportunities they have seen since the Global Financial Crisis. The massive demand for protection in the shape of credit-default swaps is only exasperating the issue," Weston added.

On Tuesday, the Big Four dropped between 3.96 and 4.78 percent even though Australian banks do not have the same exposure to liquidity issues as their U.S. and European counterparts and their retail exposure isolates them from funding risks, according to IG analysts.

In Japan, banking stocks continued their downward slide, with shares of Mitsubishi UFJ (Tokyo Stock Exchange: 8306.T-JP) down 7.08 percent, SMFG (Tokyo Stock Exchange: 8316.T-JP) down 4.04 percent and Mizuho Financial (Tokyo Stock Exchange: 8411.T-JP) shedding 5.40 percent, as concerns remain over their profitability after the Bank of Japan surprised markets toward the end of January by introducing a negative interest rate policy.

Oil prices were up in Asian trading hours, with U.S. crude futures gaining 2.15 percent to $28.54 a barrel, after dropping 4.18 percent during U.S. hours. Global benchmark Brent was up 2.11 percent at $30.97, after a 6.17 percent drop overnight.

The slight gains in oil came after the much-battered commodity found some support overnight , following a report on Iran's Press TV that Iranian oil minister Bijan Zangeneh had said Tehran was ready to negotiate with Saudi Arabia over current conditions in the oil market.

Currently the oil market remains oversupplied and U.S. data from the American Petroleum Institute (API) showed U.S. crude stockpiles rose by 2.4 million barrels to 503.4 million in the week to Feb 5.

But major energy plays across Asia were mostly lower, with Santos (ASX: STO-AU) down 2.61 percent, Woodside Petroleum (ASX: WPL-AU) dropping 0.94 percent and Inpex (Tokyo Stock Exchange: 1605.T-JP) shedding 2.81 percent. Tokyo-based Cosmo Energy gave up early gains to finish 1.62 percent lower.

Stateside, U.S. Federal Reserve chair Janet Yellen will testify on the economy before congressional committees on Wednesday and Thursday. Global financial markets and investors will be watching her testimony closely, looking for clues about what the Fed might do in the future about interest rates.

ING's head of research for Asia Tim Condon said in a note that markets expect to get some insight into what elevated financial market volatility means for Fed policy. "Last week Fed Vice Chairman Fischer said it was difficult to judge the likely implications of market volatility."

Major indexes on Wall Street finished nearly flat, with the Dow Jones industrial average (Dow Jones Global Indexes: .DJI) falling 12.67 points, or 0.08 percent, to 16,014.38. The S&P 500 (INDEX: .SPX) fell 1.23 points, or 0.07 percent, to 1,852.21, while the Nasdaq composite (NASDAQ: .IXIC) slid 14.99 points, or 0.35 percent, to 4,268.76.

— CNBC's Huileng Tan contributed to this report.

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