Adds comments, details and updates stock prices
By Junko Fujita and Satoshi Sugiyama
TOKYO, March 23 (Reuters) - Japan's stocks and bonds sank to multi-months lows on Monday as an escalation in the Middle East war stoked inflation fears and concerns over an economic slowdown.
The Nikkei .N225 slumped as much as 5% earlier in the session, wiping out all its gains for the year. The Nikkei had surged to a record high of 59,332.43 last month and was on track to breach the 60,000 mark, fuelled by expectations that Prime Minister Sanae Takaichi's stimulus plan would accelerate corporate growth.
The index traded more than 14% lower from the record high on Monday, as the Strait of Hormuz, a vital link to Japan's oil supply, remains closed. The country gets around 90% of its oil shipments via the passage.
"Local firms may have to lower their outlook for the next fiscal year due to the surging oil prices from the prolonged Middle East war," Kazuaki Shimada, chief strategist at IwaiCosmo Securities.
"The rising oil prices would also slow down and hurt the economy, which would also affect corporate earnings."
The Nikkei .N225 was last down 3.5% at 51,514.78, as of 0147 GMT, and the broader Topix .TOPX fell 2.86% to 3,504.78.
The 10-year Japanese government bond yield JP10YTN=JBTC jumped as 6 basis points (bps) to 2.320%, its highest point since January 21.
Bond yields move inversely to prices.
Iran said on Sunday it would strike the energy and water systems of its Gulf neighbours if U.S. President Donald Trump followed through with a threat to hit Iran's electricity grid in 48 hours, extinguishing any hope of an early end to the war, now in its fourth week.
Trump said on Sunday that Iran had 48 hours to open the vital strait, which is effectively closed for most vessels.
Inflation may add pressure on global central banks to raise interest rates, which is negative to equities, said Shuutarou Yasuda, a market analyst at Tokai Tokyo Intelligence.
The Bank of Japan held its interest rates steady on Thursday but kept the possibility of an early rate hike alive by warning surging oil prices could exacerbate inflationary pressures.
Chip-related shares led the Nikkei's decline, with Advantest 6857.T and Tokyo Electron 8035.T falling 5.8% and 3.1%, respectively.
Of more than 1,600 stocks trading on the Tokyo Stock Exchange's prime market, 94% declined, and 4% advanced, and 1% traded flat.
(Reporting by Junko Fujita; Editing by Tom Hogue and Sherry Jacob-Phillips)
((junko.fujita@thomsonreuters.com;))
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