The benchmark Nikkei index plunged 5 percent to a 20-month low Tuesday, tracking drops on Wall Street since late last week amid concerns over a slowdown in the world's largest economy, with exporter stocks also hurt by a strong yen.
The 225-issue Nikkei Stock Average ended down 1,010.45 points, or 5.01 percent, from Friday at 19,155.74, the lowest level since April 2017. Financial markets were closed Monday in Tokyo for a national holiday. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished 72.64 points, or 4.88 percent, lower at 1,415.55.
All sectors fell, with precision instrument, pharmaceutical, and machinery issues leading the decliners.
As the market opened, the Nikkei index quickly fell below the psychologically important 20,000 line -- the first drop below the line in 15 months -- tracking a nearly 3-percent tumble overnight in the Dow Jones Industrial Average to its lowest level in 15 months.
"Although the U.S. economy is strong right now, traders have started to see a risk of the world's largest economy weakening next year as the effects of (President Donald) Trump's tax cuts start falling off," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
Investors also reacted to reports over the weekend that Trump is discussing removing Federal Reserve Chairman Jerome Powell and that a partial government shutdown in the country may stretch into next year, brokers said.
"Reports that Powell may be removed fueled concerns over the neutrality of the country's central bank...if this actually happens then the bank will lose its power to make policies just based on financial conditions," Fujito added.
The selloff Tuesday came as caution in market sentiment has increased since the Fed raised interest rates and indicated two more rate hikes in 2019 at its policy meeting last Wednesday, defying earlier market expectations it would slow down the pace of rate increases more aggressively to bolster the country's economy.
The Nikkei index has already fallen 14 percent this month.
On Tuesday, currency trading also hurt sentiment in the stock market as the dollar's fall to a four-month low stoked worries over the earnings' outlook for Japanese exporters.
"A strong yen will dent Japanese firms' profits," boding ill for the country's consumption, said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management Co.
Traders grew jittery also because U.S. Treasury Secretary Steven Mnuchin talked by phone with chief executives of six major banks Sunday for assurance they have ample liquidity to support normal operations.
"Currently banks have enough money, so there was not really a need of holding such talks. Yet, since he did that purposely, it stoked worries there may be a big unseen problem in the financial markets," said Ichikawa.
"Problems in the financial sector affect money flow and increase the risk of an adverse effect on the U.S. economy," he added.
On the First Section, declining issues outnumbered advancers 2,096 to 27, while eight ended the day unchanged.
Among exporters, Toyota Motor tumbled 337 yen, or 5.3 percent, to 6,079 yen and Nissan fell 44.80 yen, or 5.1 percent, at 838.10 yen.
Sony lost 294 yen, or 5.6 percent, to 5,000 yen and Panasonic slid 54.20 yen, or 5.6 percent, to 920.00 yen.
Trading volume on the main section fell to 1,716.56 million shares from Friday's 2,067.31 million shares.