Tokyo's key Nikkei stock index suffered its largest point drop in over two months on Monday after Federal Reserve Chairman Jerome Powell's hawkish remarks about fighting inflation late last week raised worries about the U.S. economy.

Investor sentiment was hurt as the Dow Jones index logged its largest point drop since mid-May on Friday after Powell's speech at a forum in Jackson Hole, Wyoming, prompting the Nikkei to lose over 850 points at one point and finish down 762.42 points, or 2.66 percent, from Friday to close at 27,878.96, the lowest finish since Aug. 10.

A financial data screen in Tokyo shows the Nikkei Stock Average falling over 800 points to go below the 28,000 mark and the U.S. dollar rising to the 138 yen level on Aug. 29, 2022. (Kyodo)

Related coverage:

Fed chief warns of "pain" for economy amid efforts to tame inflation

The broader Topix index finished 35.49 points, or 1.79 percent, lower at 1,944.10. On the top-tier Prime Market, all the sectors declined except mining and oil and coal product issues.

In his speech, Powell warned that efforts to bring down inflation through interest rate hikes would inflict "some pain" on the economy, disappointing investors, who had expected the Fed to ease up on its aggressive rate hike campaign.

"Investors were overly optimistic, expecting that the Fed would start curtailing rate hikes this year," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

"Powell's remarks therefore shocked (investors) and led to selling all over Asia after the Dow dropped over 1,000 points," Fujito said, adding that Japanese shares may continue their downtrend on Tuesday.

Among hard-hit issues, semiconductor equipment maker Tokyo Electron lost 2,340 yen, or 5.1 percent, to 43,530 yen, while Advantest shed 350 yen, or 4.2 percent, to 8,010 yen. Kyocera went down 242 yen, or 3.1 percent, to 7,576 yen.

On the foreign exchange market, the dollar briefly rose to a one-and-a-half month high of 139.00 yen on expectations that the Fed's rate hikes will widen the interest-rate gap between the United States and Japan, where the central bank maintains an ultraloose monetary policy.

"Powell's more hawkish than expected remarks stirred speculation that the Fed may not go for interest rate cuts next year," as some investors had hoped, said Takuya Kanda, senior researcher at the Research Institute.

At 5 p.m., the dollar fetched 138.69-71 yen compared with 137.62-72 yen in New York and 137.01-04 yen in Tokyo at 5 p.m. Friday.

The euro was quoted at $0.9942-9944 and 137.89-93 yen against $0.9960-9970 and 137.00-10 yen in New York and at $0.9973-9975 and 136.65-69 yen in Tokyo late Friday afternoon.

Among Prime Market issues, declining issues outnumbered advancers 1,635 to 174, while 28 ended unchanged.

Trading volume on the Prime Market rose to 1,073.66 million shares from Friday's 855.51 million.

Bucking the downward trend, some automakers rose as the yen's sharp fall against the dollar fueled hopes for an increase in their overseas profits. Subaru gained 19.0 yen, or 0.8 percent, to 2,448.0 yen, while Honda Motors edged up 15 yen, or 0.4 percent, to 3,669 yen.

The yield on the bellwether 10-year Japanese government bond rose 0.025 percentage point from Friday's close to 0.240 percent.