[TOKYO] Automakers and suppliers dragged Tokyo's Nikkei stock index almost three per cent lower on Thursday, hit by concerns about the fallout from the Volkswagen emissions scandal while a strong yen also weighed.
The losses came as Japanese dealers returned to the trading floor for the first time since Friday to catch up with hefty losses in global markets fuelled by concerns over China.
Motor giants from Toyota and Nissan to Mazda and Mitsubishi sank after it emerged Volkswagen had installed software capable of fooling official pollution tests in as many as 11 million diesel vehicles.
The news has forced the German firm's chief executive to resign, sparked a US criminal investigation and worldwide legal action. Volkswagen has also lost a third of its value this week in Frankfurt.
On Thursday Tokyo's benchmark Nikkei 225 index tumbled 2.76 per cent, or 498.38 points, to close at 17,571.83, while the broader Topix index of all first-section shares fell 2.42 per cent, or 35.41 points, to 1,426.97.
"Undoubtedly, uncertainties over the direction of US monetary policy in the wake of the Fed meeting last week have impacted Japanese markets, as well as the VW-induced selloff of auto market-related stocks," Angus Nicholson, a market analyst with IG in Melbourne, said in a note to clients.
"But the yen has also seen significant safe-haven buying as confusion clouded the trajectory of the US dollar in the wake of the Fed meeting," Nicholson said.
Toyota fell 1.85 per cent to 7,100 yen, Nissan dropped 2.50 per cent to 1,111.5 yen and Mazda plunged 6.80 per cent to 1,836 yen.
Mitsubishi dived 5.09 per cent to 932 yen, Suzuki fell 4.13 per cent to 3,699 yen, and Subaru-maker Fuji Heavy Industries lost 3.26 per cent to 4,243 yen.
Among Volkswagen's suppliers, Aisin Seiki plunged 7.39 per cent to 3,945 yen, and NGK Spark Plug closed down 4.03 per cent at 2,805 yen.
The Nikkei's losses also came after a global sell-off this week sparked by more soft Chinese data that added to worries of a sharp slowdown in the world's number two economy and key driver of global and regional growth.
Concerns over the global outlook have pushed investors into assets considered safer bets, such as the yen, which in turn hurts Japanese exporters as it cuts their repatriated profits.
The greenback fell to 120.02 yen from 120.28 yen Wednesday in New York, while the euro traded at 134.40 yen compared with 134.50 yen.
"The yen strengthened 1.7 per cent immediately after the Fed meeting, and is still 1.0 per cent stronger than where it was trading just before the meeting as volatile trading this week has spurred renewed bouts of yen buying," IG's Nicholson said.
"Indeed this yen strength has also been a key factor hurting Japanese equity prices."