Japanese stocks enter bear market as yen strengthens
Japanese shares have tumbled after the yen hit a 10-week high against the US dollar, triggering concerns of a drop in exporters' profits.
The Nikkei 225 index fell 6.5% on Thursday. The drop put the market in bear territory, often defined as a 20% fall from a stock index's recent peak.
The index has fallen 22% since hitting a five-and-a-half-year high in May.
A strong yen erodes the value of exporters' profits when they repatriate their foreign earnings back home.
The Japanese currency rose to 94.06 yen against the US dollar in Asian trade, its highest level since 4 April.
Investor sentiment has also been hurt by the Bank of Japan's decision earlier this week to hold back on expanding its stimulus programme.
At the same time, there have also been concerns whether recent aggressive policy moves announced by Japan would be enough to sustain a long term economic recovery in the world's third-largest economy.
However, analysts said the biggest concern among investors was the fluctuation in the yen's value.
The Japanese currency has weakened substantially over the past few months after Japanese policymakers introduced steps aimed at boosting growth.
These steps, which include the central's bank's decision to double the country's money supply, saw the yen fall nearly 30% against the US dollar between November and May.
The drop in the yen saw many leading exporters report a jump in profits and also triggered a stock market rally in Japan.
However, the yen has strengthened over the past couple of weeks, rising more than 8% against the US dollar since 22 May, prompted by concerns that the US central bank may scale back its stimulus programme.
"Whether the yen's strength will persist or not is a key," said Hiroyuki Fukunaga, chief executive of Investrust.
"If it does, companies' earnings will be trimmed, and investors are extremely concerned that the incentive to chase the Japanese market higher will be erased."
Other Asian markets also dipped on Thursday amid uncertainty over the impact of a potential scaling back of stimulus by the US Federal Reserve.
In China the Shanghai Composite Index lost 3.1%, Hong Kong's Hang Seng was down 2.7% and South Korea's Kospi shed 1.4%.
The US central bank had introduced quantitative easing, a programme under which it buys bonds to increase the money supply and improve liquidity in the financial system, in an attempt to spur economic growth,
However, speculation has been rife that the central bank may scale back the programme,
This is after the minutes of the Fed's last meeting revealed last month said that "a number" of officials favoured slowing down the Fed's efforts as early as June.
Analysts said that investors are likely to remain cautious until there is more clarity on what steps the US central bank is planning to take.
"Market volatility is expected to stay elevated until the Fed's policy meeting next week, at which we may see with more clarity into the tapering issue," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
The Federal Reserve next meets on 18-19 June.