Japanese stocks dropped 7 percent to a two-year low and futures prices plunged on Tuesday as the country's prime minister said radiation levels at a stricken nuclear plant had become high, deepening concerns about the economic toll of the disaster.
After Naoto Kan's comments, Nikkei equity futures prices dropped sharply, triggering a circuit breaker to halt trade. When it resumed, the futures were down more than 12 percent on the day. He also said the possibility of leakage had increased.
Japanese government bond prices rose as equities fell. The pressure on Japan's already bleak fiscal situation in any reconstruction was likely to be high, with Japan's yield curve steepening some 10 basis points since Friday.
Unlike Monday, when construction stocks rose, none of the 225 constituents of the benchmark Nikkei average were up on Tuesday.
Four explosions, including two on Tuesday, have occurred at the Fukushima Daiichi nuclear complex in Japan's ravaged northeastern coast since the magnitude 9.0 quake on Friday, raising concerns about radiation leakage and the longer-term stability of power supply.
All focus is on the nuclear crisis. In the situation where the crisis appears to be worsening, foreign investors, domestic fund operators are pulling out from Japanese shares, Hideyuki Ishiguro, a supervisor at Okasan Securities in Tokyo.
The broad TOPIX share index slumped 7 percent by the regular midday break to 787.90, after posting the biggest decline since the 2008 financial crisis on Monday on record volume.
So far this week, the index is down nearly 14 percent and has shed around $528 billion in market capitalization.
The Nikkei share average dropped 6.5 percent by the midday break to 8,999.73. The sharp decline in the futures market will pull the cash market lower when it resumes trade.
Chart support for the Nikkei index lies at around 8,800 -- the low from September 2010.
Power companies were the biggest percentage losers in early trading, with shares of Kansai Electric Power and Chubu Electric Power, which both own nuclear plants, down 12 percent.
Shares of Tokyo Electric Power were untraded with a glut of sellers at the indicated price of 1,341 yen on Tuesday, down 280 yen or 17 percent from Monday's close as an emergency appeared escalate at the utility giant's quake-damaged nuclear reactors in the northeast.
The firm's credit default swap spreads, contracts that protect against debt default and restructuring, were 150/170 basis points compared with 40 basis points on Friday -- an indication of increasing caution on the outlook for TEPCO.
Since the quake, Japan's CDS spreads have widened by nearly 20 basis points to 97 basis points, but were still narrower than the record 120 basis points reached in February 2009.
Ten-year Japanese government bond futures rose 0.40 point to 140.49, on the way to testing the high for the year hit on January 4 at 140.71.
In the cash market, the 10-year yield fell to 1.17 percent, the lowest since January 2011. The 5-year to 20-year yield curve, or the difference between the maturities, steepened to 158 basis points.
The immediate impact on Japan may be stagflationary: negative for growth and upward pressure on the prices of items in short supply such as rice, some other foods and possibly even some materials needed for reconstruction, said Gerard Lyons, Standard Chartered's chief economist, in a note.
The scale of the devastation means that the region impacted may take years to recover fully, as it needs major reconstruction and some of the agricultural areas will need to be repopulated; not easy for a country with a rapidly aging population.
The yen was steady at 81.72 per dollar, relatively stable in the face of the equity market selloff. Traders were on alert for signs of Japanese investor capital repatriation that could push up the yen similar to what happened after the 1995 Kobe earthquake.
The dollar had touched a low around 80.60 on Monday, less than a yen from the record low of 79.75 yen touched in 1995 on EBS.
(Additional reporting by Tokyo News bureau and Masayuki Kitano in SINGAPORE, Writing by Kevin Plumberg)