Japanese stocks plunged 12 percent on Tuesday on reports of rising radiation levels near Tokyo and lurched toward their biggest loss since the 1987 crash, in a panic selloff likely to compound the economic impact on the quake-stricken country.
Government bond futures soared after Prime Minister Naoto Kan said the risk of nuclear contamination was rising at the Fukushima Daiichi complex on Japan's ravaged northeastern coast, 240 km (150 miles) north of Tokyo.
Equity futures fell and the yen rallied as risky assets were dumped. The yen steadied soon after, raising suspicion that authorities had intervened. The Ministry of Finance declined to comment on intervention.
In contrast to Monday's trading, when construction stocks rose, none of the 225 constituents of the benchmark Nikkei average gained on Tuesday. The broad TOPIX index of Japanese stocks has dropped by a fifth this week.
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 TOPIX share index plummeted 12.1 percent to 743.10, after posting the biggest full-day decline since the 2008 financial crisis on Monday on record volume. The index was on course for the biggest one-day drop since the stock market crash of October 1987.
The Tokyo Stock Exchange's biggest companies have lost about $720 billion in value this week.
The Nikkei share average dropped 12.7 percent to 8,399.97, the lowest in two years.
Shares of Tokyo Electric Power, the owner of the stricken nuclear plant, did not trade, although sellers massed at the indicated price of 1,341 yen on Tuesday, down 280 yen, or 17 percent, from Monday's close. There were no buyers.
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 nervousness about the company's future.
Since the quake, the Japanese government's CDS spreads have widened by more than 20 basis points to 99 basis points, but were still narrower than the record 120 basis points reached in February 2009.
Ten-year Japanese government bond futures rose 0.90 point to 140.83, and hit a new high for the year.
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 159.5 basis points.
The focus is the steepening yield curve beyond 10-year zones ahead of a 20-year bond auction tomorrow, said Chotaro Morita, head of fixed income strategy research at Barclays Capital Securities in Tokyo.
Amid a lot of uncertainty, there are possibilities of additional bonds issuance with the supplement budget. Investors including life insurers may back off at the auction, Morita said.
The yen was up slightly at 81.53 per dollar, relatively stable in the face of the equity market selloff. Traders were on alert for signs that Japanese investors were repatriating funds, a phenomenon pushed up the yen in the wake of the 1995 Kobe earthquake.
At one point, the dollar spiked against the yen in volatile trading and dealers suspected the authorities may have intervened in the market. They later downplayed the idea.
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
The immediate focus of market participants has been the escalating nuclear crisis. They are also worried that Japan's economy may stall after the 9.0 magnitude quake that struck on Friday.
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.
(Additional reporting by Tokyo News bureau and Masayuki Kitano in SINGAPORE, Writing by Kevin Plumberg)