Tokyo's Nikkei stock index ended down nearly 3 percent Wednesday, hurt by overnight plunges on Wall Street and the yen quickly recouping an earlier dive against the U.S. dollar, following strong remarks from Japan's finance minister.
The dollar surged to near the psychologically important 145 yen line, a 24-year high, early Wednesday after stronger-than-expected U.S. consumer price index data on Tuesday fueled expectations that the Federal Reserve will likely continue raising interest rates aggressively to tame inflation.
But it retreated to the lower 143 yen level after Finance Minister Shunichi Suzuki suggested that direct intervention in the currency market is an option if "clearly volatile" moves persist.
The 225-issue Nikkei Stock Average shed 796.01 points, or 2.78 percent, from Tuesday at 27,818.62. The broader Topix index finished 39.11 points, or 1.97 percent, lower at 1,947.46.
On the top-tier Prime Market, decliners were led by electric appliance, rubber product, and precision instrument issues.
In the debt market, the yield on the benchmark 10-year Japanese government bond rose 0.010 percentage point from Tuesday's close to the Bank of Japan's cap of 0.25 percent, influenced by a jump in U.S. Treasury yields.
The yen also strengthened after the BOJ asked market participants about their current foreign exchange trading in a so-called "rate check," sources close to the matter said, a move interpreted as a precursor to direct currency intervention.
At 5 p.m., the dollar fetched 143.30-33 yen compared with 144.57-67 yen in New York and 142.25-26 yen in Tokyo at 5 p.m. Tuesday.
The euro was quoted at $0.9986-9988 and 143.11-15 yen against $0.9963-9973 and 144.09-19 yen in New York and $1.0146-0148 and 144.33-37 yen in Tokyo late Tuesday afternoon.
Despite the yen's recovery, Takuya Kanda, senior researcher at the Gaitame.com Research Institute, said the currency may not rise further as there is the view in the market that "Japan cannot conduct intervention without gaining consent from the United States, which will never agree to sell the dollar."
Tokyo stocks were sold throughout the day as investor sentiment was dented by the Dow Jones index suffering its biggest points fall in over two years following the release of the U.S. inflation data for August.
The CPI rose 8.3 percent in the month from a year earlier, higher than the market's consensus of an 8.1 percent increase. The data led to views that the Fed may implement a 1 percentage point rate hike at its policy meeting next week, higher than an earlier anticipated 0.75 percentage point increase, some analysts said.
The stock market was expecting to see a slowdown in inflation in the United States but the strong reading made investors jittery about the "outlook for the U.S. economy as a result of aggressive interest rate hikes," said Shingo Ide, chief equity strategist at the NLI Research Institute.
The prospect of aggressive monetary tightening by the U.S. central bank hurt investor sentiment as higher interest rates lead to increased borrowing costs for households and companies, and could deal a blow to the world's largest economy.
Export-related issues such as automakers were sold after the yen recouped some of its earlier loss. Toyota Motor fell 29 yen, or 1.4 percent, to 2,038 yen, while Suzuki Motor lost 97 yen, or 1.9 percent, to close at 4,886 yen.
Technology shares lost ground after the tech-heavy U.S. Nasdaq index fell sharply. Semiconductor equipment maker Tokyo Electron plunged 1,620 yen, or 3.7 percent, to 42,280 yen, while chipmaker Screen Holdings dipped 190 yen, or 2.0 percent, to 9,240 yen.
Among Prime Market issues, declining issues outnumbered advancers 1,675 to 131, while 31 ended unchanged.
Trading volume on the Prime Market rose to 1,200.48 million shares from Tuesday's 931.59 million.