The yen surged to a record high against the dollar and shares in Japan and elsewhere in Asia 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 markets, hitting shares 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 nuclear crisis and the tsunami's economic and human toll.
Operators of the Fukushima Daiichi nuclear complex, 240 km (150 miles) north of Tokyo, were they were trying again on Thursday to use military helicopters to douse the plant's overheating reactors.
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.
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 78.90.
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 about 1.8 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 5.2 percent and Toyota 4.2 percent.
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 1.2 percent, with Hong Kong's Hang Seng <.HSI> down 1.8 percent.
Benchmark 10-year Japanese government bond futures rose 0.10 point to 139.82, and U.S. Treasuries firmed, with the 10-year yield slipping toward a three-month low.
Bond traders said volume was low and the market volatile as players braced for possible Bank of Japan intervention or monetary easing.
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.
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 $7 to $1,392.25 an ounce.
Oil paused, after a run-up the previous day on worries over Middle East supplies, with Brent crude flat at $110.62 a barrel and the U.S. benchmark edging up 0.4 percent to $98.35.
There is so much uncertainty in Japan and its ability to drive economic recovery that it's something that is casting a shadow on the outlook for global growth, said Ben Westmore, a commodities analyst at National Australia Bank.
While that shadow lasts, it's going to be difficult for oil prices to go higher.
(Reporting by Hideyuki Sano and Antoni Slodkowski in Tokyo and Wayne Cole in Sydney; Editing by Kim Coghill and Richard Borsuk)