Asian markets fell on Monday amid concern about escalating territorial dispute between Japan and China. A stronger yen was also weighing on Japanese exporters. Global investors will keep an eye on a possible bailout request from Spain and US economic data.

The MSCI Asia Pacific Index dropped 0.6% to 122.69 at 11:36 a.m. in Tokyo, with about three stocks falling for each that rose. Last week, the Index lost 0.1%, halting a two-week advance. It had gained 5.4% this quarter through last week. The Asian benchmark is up ~8% this year.

The Nikkei in Japan was down ~0.6% while the Hang Seng index in Hong Kong was flat. The Shanghai Composite index in China was static while the Kospi in South Korea dropped 0.5%.

The Straits Times index in Singapore lost 0.2% while the Taiex in Taiwan rose 0.2%. The S&P/ASX 200 index in Australia was down 0.5%.

China and Japan have been locked in a territorial dispute over a group of islands known as the Diaoyu in Chinese and Senkaku in Japanese.

Over the weekend, a Japanese newspaper reported that China had cancelled events this week to mark the 40th anniversary of the normalization of ties between the two countries. 

Japan’s prime minister warned Beijing that anti-Japanese protests in China could hurt the Chinese economy.

China’s benchmark index hit the lowest level since January 2009 after a central bank adviser said that the economic slowdown may extend into next year. 

The Shanghai Composite Index slid 0.7% to 2,012.36 as of 10:13 a.m. local time. It plunged 4.6% last week after a report on manufacturing signaled a contraction and escalating tensions with Japan threatened trade. The Shanghai Composite is down 8.5% this year.

The economic slowdown may persist into 2013 amid a lack of funding for approved infrastructure projects, according to Song Guoqing, an academic adviser to the People’s Bank of China.

The economy will grow between 7.3% and 7.4% in the fourth quarter and 7% to 7.5% in the first half next year, Song, a Peking University professor, said in an interview in Beijing on Sept. 21. He reiterated a July forecast of 7.4% third-quarter growth.

A survey showed that China’s manufacturers and retailers are less optimistic about sales than they were three months ago, and more companies are cutting jobs.

Citigroup has recommended investors to stay "underweight" on Chinese Stocks. 

Policy loosening will be “relatively moderate” as the economy is slowing gradually, the China Securities Journal reported. 

China’s central bank has left benchmark interest rates unchanged since July. Policy makers have also kept bank reserve requirements at 20% since May, and have allowed money-market rates to surge before the week-long National Day holiday starting Oct. 1.