Tokyo's main stock index plunged nearly 5 percent on Monday amid fears an early U.S. interest rate hike would close off overseas investment flows that have boosted the Japanese market. The dollar rose sharply against the yen.
The Nikkei Stock Average of 225 issues sank 554.12 points, or 4.84 percent, to 10,884.70 points _ its lowest finish since Feb. 26, when the index closed at 10,815.29. On Friday, the index lost 132.52 points, or 1.15 percent.
The dollar was quoted at 113.17 yen by late afternoon Monday, up 2.57 yen from late Friday and also above the 112.15 yen it bought in New York.
With the key U.S. interest rate at a 46-year low of 1 percent, U.S. investors have plowed cash into foreign stock markets, including Japan's, which has rebounded amid rising exports to China and the United States.
Investors chose to pull out of some of those investments after a stronger-than-expected U.S. employment report for April renewed prospects for higher U.S. interest rates.
"It's an unwinding of the liquidity bubble," said Marc Desmidt at Merrill Lynch Investment Managers. "There's been pressure against the wall, and the dam burst today."
Some of the biggest beneficiaries of the recent rally _ banks, real estate, retail and insurance companies _ led the declines.
Major bank UFJ tumbled 9.9 percent, while rival Mizuho lost 9.3 percent. Japan's biggest supermarket chain, Ito-Yokado, plunged 9.6 percent.
Morgan Stanley equity strategist Naoki Kamiyama said the Nikkei could fall as low as 10,000 over the next several months. The Nikkei has already lost 1,279.19 points, or 10.52 percent, over the last six sessions.
The broader index of all issues on the Tokyo Stock Exchange's first section tumbled 65.35 points, or 5.68 percent, to 1,085.54. The index lost 14.35 points, or 1.23 percent, Friday.
U.S. stocks also fell Friday on interest rate fears.
The Dow Jones industrial average plummeted 123.92, or 1.2 percent, to 10,117.34. The Nasdaq composite index lost 19.78, or 1 percent, to 1,917.96.
The dollar, meanwhile, rose against both the euro and the yen amid the speculation the U.S. Federal Reserve would raise rates. Higher interest rates make investing in U.S. bonds more attractive, which means more funds may flow into the United States from abroad and lift the greenback.
The euro fell to $1.1845 late Monday from $1.2044 late Friday. Against the yen, the euro was quoted at 134.11 yen, up from 133.18 late Friday.
The yield on Japan's benchmark 10-year government bond rose to 1.5050 percent from 1.4650 percent late Friday. Its price fell 0.35 to 99.95 points.