The yen surged to a record high against the dollar and Asian shares fell on Thursday after U.S. officials said the risk of a catastrophic radiation leak from an earthquake-stricken Japanese nuclear plant was rising.
The unfolding disaster in Japan has sent fear coursing through financial markets, hitting stocks and other riskier assets such as commodities while boosting safe-haven government debt, as investors struggle to get a fix on the scale of the crisis and the potential damage.
Operators of the Fukushima Daiichi nuclear complex, 240 km (150 miles) north of Tokyo, dumped water from helicopters on Thursday in an increasingly desperate attempt to cool overheating reactors at the plant.
Fear is the only factor driving the market today and if you look at news about temperatures rising, things exploding, you're not going to trade calmly, right? said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
European stock markets were seen falling for a seventh straight session, with financial bookmakers calling Britain's FTSE 100 <.FTSE> down 0.3 percent, Germany's DAX <.GDAXI> down 0.5 percent and France's CAC 40 <.FCHI> down 0.8 percent. <.EU>
However, U.S. stock market futures rose 0.5 percent after worries about Japan's worsening nuclear crisis sparked hefty losses on Wall Street overnight.
Finance ministers and central bankers from G7 countries were expected to discuss the impact of Japan's deepening crisis in a conference call early on Friday Asian time (2200 GMT on Thursday), but traders thought any joint intervention in currency markets was unlikely.
Hundreds of billions of dollars have been wiped off global stock markets since Japan's northeast coast was devastated by an earthquake and tsunami on Friday and several nuclear reactors began overheating.
The yen spiked around 4 percent against the dollar, initially driven by speculation that Japanese insurers would have to repatriate funds to pay for massive claims following last Friday's 9.0 magnitude quake and the devastating tsunami it triggered.
That run-up set off a wave of stop-loss and options-related selling that sent the currency rocketing as far as 76.25 to the dollar on electronic trading platform EBS in increasingly chaotic trading, before easing to around 79.25.
It's mayhem out there, said one trader at an Australian bank in Sydney as liquidity evaporated and bids were pulled. The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in.
Japan's Finance Minister Yoshihiko Noda blamed speculation for the spike in the yen and said he would closely watch market action. Markets usually interpret such comments as a reminder that the authorities could intervene to curb the currency.
There's a real possibility that authorities would intervene to calm the markets, though I don't think it will be heavy, said Junya Tanase, a foreign exchange strategist at JPMorgan Chase in Tokyo.
Japan's Nikkei <.N225> fell 1.4 percent, with big exporters such as industrial robot maker Fanuc <6954.T> and car maker Toyota <7203.T>, whose overseas earnings are eroded by a stronger currency, taking the most points off the index. <.T>
Fanuc fell 4 percent and Toyota 2.2 percent. The Nikkei had been down more than 4 percent earlier in the day, but clawed back some ground as foreign investors bought shares in some beaten down blue-chips.
Japanese stocks had suffered their biggest two-day rout since the 1987 crash on Monday and Tuesday before rebounding nearly 6 percent on Wednesday.
Asian shares outside Japan <.MIAPJ0000PUS> were down about 0.9 percent, with Hong Kong's Hang Seng <.HSI> down 1.8 percent.
Benchmark 10-year Japanese government bond futures jumped in early trade before reversing course to close a fraction lower.
Fast money accounts are making a killing in this volatile market moved by rumor after rumor, said a trader at a foreign bank in Tokyo.
U.S. Treasuries firmed, with the 10-year yield slipping toward a three-month low.
The CBOE Volatility Index or VIX <.VIX>, Wall Street's favorite measure of investor fear, rose 20.89 percent to close at 29.40 on Wednesday, its highest level since July 6. In the last two days, the VIX is up nearly 40 percent.
Volatility is a product of the uncertainty that lingers out there, said Jamie Spiteri, senior dealer at Shaw Stockbroking in Australia.
A lot of investment in the market is being pulled back because of the uncertainty attached to something that hasn't really got any recent or significant precedent.
Worries about Japan and a spate of weak U.S. housing data sent key Wall Street stock indexes down 2 percent overnight, with the S&P <.SPX> falling into negative territory for the year. <.N>.
Copper edged down on the Shanghai and London markets and spot gold slipped more than $5 to $1,394.20 an ounce.
Oil rose, with Brent crude approaching $111 a barrel as worries over supply disruptions from upheaval in the Middle East outweighing concerns that the Japan disaster would hit the global economy and demand for energy.
(Reporting by Hideyuki Sano and Antoni Slodkowski in Tokyo and Wayne Cole in Sydney; Editing by Kim Coghill and Richard Borsuk)