Japanese stocks suffered their biggest slide since the 2008 financial crisis Monday, with investors eyeing a further drop as the uncertainty over the country's nuclear crisis compounds worries that the quake and tsunami will cause deeper economic pain than initially thought.
The TOPIX tumbled 7.5 percent on record trading volume as investors bailed out of big blue-chip companies seen taking a hit from the need for rolling electricity blackouts on top of the disruptions to supply chains following the massive quake.
With Monday's selloff, the market capitalization of shares on the Tokyo stock exchange's first section fell by roughly $286 billion -- greater than the size of Finland's economy.
Analysts said the risk was for a further drop in shares as investors come to terms with the fast-rising economic toll from Japan's worst crisis since World War Two.
With investors on edge any stronger tremors can trigger panic selling, particularly if something bigger was to happen in Tokyo, said Masayuki Kubota, senior fund manager at Daiwa SB Investments in Tokyo. I can talk forever about what happened in the past or speculate, but for now we just need to wait.
The yen slid against the dollar on hedge fund selling after the Bank of Japan announced a total of 15 trillion yen ($183 billion) in fund injections to keep money markets stable.
But market players are keeping an eye out for potential yen gains if Japanese institutional investors, such as insurers, sell foreign assets and bring home cash to cover the quake's mounting costs. In the six years though 2010, Japanese investors bought $1.25 trillion of foreign securities, according to Ministry of Finance data.
The Japanese government bond yield curve steepened, with super-long debt retreating as market players anticipated the potential fiscal costs of future rebuilding efforts, even as short- to medium-term JGBs rallied on the BOJ's injections.
Japanese automakers, electronics firms and oil refiners saw their share prices drop by double digit percentages at one point after having to shutter key factories after Friday's earthquake and tsunami, which are feared to have killed more than 10,000 people and curb economic activity.
Investors are selling aggressively as they want to remove risks. The market will sell until they have completed their selling needs, but I really can't tell the extent of a possible sales as this is not the normal market condition, said Hiroshi Arano, advisor at Mizuho Asset Management in Tokyo.
The market will be very cautious about buying Japanese shares even though the value of Japanese shares are attractive after falls. The market will see the condition of the actual state of the Japanese economy over the next two to three months, before making any concrete decision, Arano said.
CONSTRUCTION FIRMS JUMP, TECH DUMPED
The benchmark Nikkei index fell 6.2 percent to 9,620.49 and slumped to a four-month intraday low at one point, with technology companies such as Kyocera Corp and Canon Inc among the biggest drags on the market.
In evening session trade, Nikkei futures slipped further after a report that the second reactor at the Fukushima nuclear facility had exposed fuel rods and a meltdown could not be ruled out.
The broader TOPIX index closed down 7.5 percent, the largest daily decline since October 2008, when global markets reeled in the wake of the Lehman Brothers failure, to 846.96.
Domestic investment trusts and funds are dumping everything today, said an equities trader at a Japanese domestic institutional investor, who declined to be quoted by name.
The Nikkei's fall comes after several months of solid performance. For much of the past six months, Tokyo shares outperformed their emerging Asian peers and overseas investors scooped up roughly 3 trillion yen since November.
As of Thursday, the day before the earthquake struck, the Nikkei had climbed 13 percent in the five months starting in November, far outpacing a 1.7 percent gain in MSCI's index of Asia-Pacific shares outside Japan.
Shares of Tokyo Electric Power, Japan's biggest utility that owns a nuclear plant that may be close to meltdown, were a big focus for the market. TEPCO ended ask-only at 1,621 yen, down 23.6 percent.
Construction-related businesses rallied on the back of expectations for demand from rebuilding efforts, with Kajima Corp jumping 22.2 percent to 259 yen and Taiheiyo Cement climbing 21.2 percent to 137 yen.
After the earthquake in Kobe in January 1995, construction stocks outperformed the broader market consistently for a year after the disaster, Citi research showed.
In the bond market, the five-year/20-year JGB yield spread widened by 11.5 basis points to a three-month high of 159.5 basis points at one point, indicating investors were selling longer-term maturities.
Super-long JGBs, 20- to 30-year bonds, were hit by concerns about the fiscal impact from the damages caused by the earthquake and as market players braced for the possibility that Japanese life insurers may sell the segment of the yield curve to fund payments to policy holders.
Underscoring concerns about Japan's fiscal health, spreads on Japanese sovereign credit default swaps widened about 10 basis points to 91 basis points, near the peaks close to 100 basis points reached last year during the euro zone crisis.
Short-term to 10-year JGB yields fell on the BOJ's record one-day fund supply to the money market, seen as a gesture of reassurance since the interbank market is already awash in cash.
The yen jumped early Asia toward a record high against the dollar but quickly pared gains in volatile trade as nervous traders waited to see what action Japanese officials will take to keep markets calm after Friday's quake and tsunami.
The dollar initially extended its losses after having slid more than one percent against the yen on Friday, touching a four-month low around 80.60 yen. The dollar later rebounded sharply in thin trade and last stood at 82.13 yen, up 0.4 percent on the day.
At a one-day policy meeting, the BOJ also doubled the size of its asset-buying scheme to 10 trillion yen while keeping interest rates unchanged at 0.1 percent. Japanese financial markets took the decision in stride.
(Additional reporting by Yoshiko Mori and Hideyuki Sano and Masatsugu Hisatsune at IFR; Writing by Masayuki Kitano; Editing by Kevin Plumberg)