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Tokyo: Nikkei stock index drops 3% on yen rally

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[TOKYO] Tokyo's benchmark stock index plunged Thursday as the soaring yen hammered exporters after the Bank of Japan held fire on launching fresh stimulus, ahead of Britain's nail-biter EU membership vote next week.

The Nikkei 225 tumbled 3.05 per cent, or 485.44 points, to 15,434.14 by the close, while the broader Topix index of all first-section shares was down 2.78 per cent, or 35.55 points, to finish at 1,241.56.

The Japanese market opened in the red with bond yields dropping to record lows and a pick up in the yen signalling that investors are nervous about the June 23 referendum on Britain's membership in the European Union.

A vote to leave the 28-member economic bloc could have significant consequences for more than 1,000 Japanese firms that operate in Britain - many see it as a staging point for doing deals in Europe.

The Tokyo market's losses spiked in the afternoon as the yen surged to a 21-month high against the dollar in the wake of the BoJ's decision to leave its massive 80 trillion yen asset-buying plan unchanged.

Analysts said the central bank was likely waiting to see the outcome of the vote before making any moves, despite weakness in the world's number three economy.

Investors tend to buy the yen as a safe asset in times of turmoil, but the stronger currency is bad for Tokyo stocks as it threatens Japan Inc's profitability.

The yen's rally will also raise fresh concerns about Prime Minister Shinzo Abe's faltering growth blitz, known as Abenomics, as Japan struggles to mount a firm economic recovery.

"The market is worried Abenomics isn't working," Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia, told Bloomberg News.

"Most companies are forecasting a much weaker yen, so it's not going to be good for exporters." The Japanese unit briefly climbed to 103.96 against the dollar, its strongest level since August 2014, in afternoon deals.

The BoJ's decision came after the Federal Reserve on Wednesday decided against raising interest rates and its boss Janet Yellen sounded a warning over the possible British exit - or Brexit - from the EU.

World markets have been in turmoil over the past week on worries about the global economic outlook and, in recent days, growing concerns that Britain may pull out of the bloc.

In Tokyo share trading, Toyota dropped 3.33 per cent to 5,281 yen by the close, Sony tumbled 3.21 per cent to 2,879.5 yen, while Uniqlo operator Fast Retailing, a market heavyweight, dropped 3.52 per cent to 27,260 yen.

Banking giant Mitsubishi UFJ was down 1.30 per cent to 485.7 yen.

On debt markets, the yield on Japan's 10-year government bond dropped to minus 0.21 per cent, a fresh record, with other maturities also falling to new lows.

This week, Germany's 10-year debt yield fell below zero for the first time.

The drops underscore caution in the market as it suggests that investors are increasingly willing to accept negative returns in exchange for holding rock-solid government debt.