Typhoon Khanun, categorised by Taiwan's weather bureau as the second-strongest typhoon level, slowly headed towards its northeastern coast with maximum winds of 198km/h.
As of 1.15pm Taipei time (0515 GMT), the eye of the typhoon was 340km off Taipei in the East China Sea, heading in a westerly direction at 3km/h.
The storm was expected to brush past Taiwan's northern coast late on Thursday before making a sharp turn to the northeast on Friday, bringing total rainfall of up to 0.6 metre in mountainous central Taiwan and 0.3 metre of rain on the mountains near Taipei.
Northern cities including the capital Taipei shut businesses and schools.
Taiwan's stock and foreign exchange markets were also closed.
More than 110 international and domestic flights have been cancelled while all domestic ferry lines were suspended.
In Taipei, rain and wind have brought down dozens of street signs and trees, while subway services were reduced and food delivery services were suspended.
Hundreds of soldiers were on stand-by in nearby cities for disaster response.
The storm had cut power to more than 16,000 households across Taiwan although the majority of them had been restored.
In Japan's popular tourist destination Okinawa, Typhoon Khanun left two people dead, injured at least 62 people and knocked out power to more than 200,000 households during the past two days.
Typhoon Khanun comes just a week after Typhoon Doksuri brought heavy rains and strong winds to Taiwan's south.
