KUBTY Kubota Corporation (PK)

Investors sharply scaled back expectations for Japan's soon-to-be-announced stimulus package, sinking stocks and pumping up the yen on Tuesday.

The Nikkei Stock Average dropped 1.6% and the yen strengthened sharply: The dollar-yen pair fell below 105.00 for the first time since July 15 and extended losses to briefly touch 104.77 in midmorning trade. The yen was recently trading at 104.865.

Elsewhere, Australia's S&P/ASX 200 fell 0.2%, Hong Kong's Hang Seng Index was up 0.9%, while China's Shanghai Composite Index was up 0.5%.

South Korea's gross domestic product for the second quarter grew faster than expected, by 3.2% on year, compared with 2.8% growth in the previous three-month period, thanks to government measures to boost consumption. The Kospi was trading up 0.4%.

A report published Tuesday by the Nikkei business daily said the Japanese government will inject ¥ 6 trillion ($56.70 billion) in direct spending, double the previous estimate. However, the spending will be spread over several years, which means the initial impact will be less than hoped, disappointing traders.

"[Japanese] fiscal stimulus looks less bold, and we aren't sure if [Bank of Japan Gov. Haruhiko] Kuroda will ease further. It's difficult to buy more from here," said Tomoichiro Kubota, a senior market analyst at Matsui Securities.

The BOJ will announce its decision on easing Friday, while further details of a government stimulus package could also emerge.

Meanwhile, expectations continue to dwindle for "helicopter money"— a radical plan in which the country's central bank prints money to fund government spending.

"For the last couple of weeks, investors were kind of expecting the BOJ moving to helicopter money," said Tim Condon, chief economist for Asia at ING Bank. "Last week, Kuroda took that option off the table," said Mr. Condon, referring to a statement Mr. Kuroda made in an interview saying such a policy wasn't a possibility.

Overnight, weakness in oil prices weighed on sentiment. The S&P 500 closed down 0.3% as U.S. oil prices lost 2.4% to $43.13 a barrel. Brent crude has since recovered to trade up 0.4%. Gold is down 0.3%.

Hiroyuki Kachi and Kosaku Narioka contributed to this article.

Write to Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

July 26, 2016 00:35 ET (04:35 GMT)

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