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THE yen soared to its highest level in more than a year against the US dollar on Tuesday, hitting 114.21 at one point and provoking a shocking 918-point or 5.4 per cent plunge in the Nikkei 225 stock average to 16,085.44 points - its biggest fall in a day in over 2 1/2 years.
This came as global stocks again dropped sharply on rising risk aversion and they provoked expressions of concern bordering on alarm from senior Japanese government officials including Finance Minister Taro Aso, who described the yen's surge as "rough".
Scarcely more than a week ago, the Bank of Japan (BOJ) shocked markets by introducing negative interest rates - a move widely seen as being aimed partly at tempering a rise at that time in the yen to around 118 to the US dollar from above 120 at the end of last year.
Some saw the yen's latest moves as a "slap in the face" for BOJ governor Haruhiko Kuroda's massive monetary easing initiatives and for Prime Minister Shinzo Abe's "Abenomics" policies, but yen appreciation is more a reflection of a desperate search by investors for "safe haven assets", analysts said.
"When something as big as negative interest rates happens but the yen nevertheless climbs higher, that tells me that something bigger is happening below the surface," former Goldman Sachs Asia vice-president Kenneth Courtis told The Business Times.
"Money is piling into safe haven trades and gold is also on fire," said Mr Courtis, who is now chairman of commodities group Starfort Holdings. The yen is, meanwhile, poised to "go even higher", he predicted.
The surging yen is bad news for corporate Japan where a sharper fall in the currency until recently - attributed largely to the BOJ's policies - had boosted company profits sharply. A rising yen, therefore, tends to push down Japanese stock prices.
Apart from the sharp slowdown in China and other emerging economies, concerns are mounting over the health of some of the world's leading banks. Industry leaders, including Deutsche Bank and Goldman Sachs, suffered sharp drops in their share prices on Monday and Japanese banks were also hit on Tuesday.
Shares of Japan's megabank Mitsubishi UFJ Financial Group lost 8.7 per cent in value while those of Nomura Holdings dropped by 9.1 per cent - almost twice the size of the drop in the Nikkei 22 average.
Some analysts argued that the chief culprit behind the global sell-off in banks and energy sectors is the US Federal Reserve's December rate rise following years of monetary stimulus.
Japan's Vice-Finance Minister for International Affairs Masatsugu Asakawa said on Tuesday he was closely monitoring the yen's surge. But dealers say that yen selling intervention by the Japanese central bank is highly unlikely given the shock tactics already being employed by the BOJ.
"Investors are a bit panicky," Daiwa Securities' senior foreign-exchange strategist Yukio Ishizuki was reported by Dow Jones as saying on Tuesday.
The US dollar is under pressure against the yen partly because short-term players are betting on a risk-off mood to take speculative yen long positions, Mr Ishizuki said. "It's unclear how far the US dollar will go down against the yen. But it's possible that they (short-term players) will go ahead with yen buying to 110 yen."
Investors "are increasingly worried about the US economy, and they are worried that a strong yen will eat into Japanese exporters' earnings", Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo, was reported as saying.