The Nikkei average slid 2.2 percent to a three-year closing low on Thursday, with financial shares tumbling as the growing crisis on Wall Street sent major US banks scrambling for merger partners. Sony Corp plunged to hit a five-year low after a Goldman Sachs rating downgrade, and other exporters such as Honda Motor Co Ltd slid amid growing concern about the impact of the financial turmoil on the broader economy.
After Lehman Brothers' bankruptcy filing and the rescue of insurer AIG failed to calm global markets, investors struggled digest potential take-overs involving No 2 US investment bank Morgan Stanley, weakened top US savings bank Washington Mutual and major UK mortgage lender HBOS.
Some market participants said they were imagining worse scenarios. "What would be more worrisome than bankruptcies is the unwinding of positions by hedge funds that exist behind investment banks," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"We will only have Goldman Sachs as an independent investment bank if Morgan Stanley finds a buyer. If Goldman Sachs were to go wrong somehow, though the situation doesn't seem that bad, we'd have global financial panic." The benchmark Nikkei average shed 260.49 points to end at 11,489.30, its lowest close since June 2005. The broader Topix lost 2.1 percent to 1,097.68.
Both the Nikkei and the Topix slid nearly 4 percent at one stage. Kazuhiro Takahashi, general manager of the equity marketing department at Daiwa Securities SMBC, said that he sees a near-term floor for the Nikkei at around 11,000.
"The view that the problems in the financial sector will damage the health of the economy is spreading, and there are worries that other factors such as currencies may also prompt downward revisions of corporate earnings estimates," he said. Individual investors in Tokyo also felt the pain.
"The value of my personal stock portfolio has fallen more than one third since the start of the credit crisis," said Kenichi Kobayashi, a 60-year-old company manager. Top lender Mitsubishi UFJ Financial Group dropped 3.4 percent to 773 yen and No 2 Mizuho Financial Group lost 4.3 percent to 397,000 yen. Nomura Holdings, Japan's biggest brokerage, sank 6.4 percent to 1,191 yen.
Sony plunged 8.7 percent to 3,270 yen after Goldman Sachs cut its rating to "neutral" from "buy", citing increasing risks to its liquid crystal display TV, digital camera and mobile phone businesses. Honda skidded 4.5 percent to 3,160 yen and Toyota Motor Corp fell 3.1 percent to 4,450 yen.
Toshiba Corp dropped 3.5 percent to 465 yen after the Nikkei business daily said it was expected to swing to a group operating loss of about 30 billion yen ($287.3 million) for the six months to September due to its weak microchip business.
On a bright note, Sumitomo Metal Mining Co jumped 7.2 percent to 1,119 yen as gold advanced after posting a record one-day gain in dollar terms the previous day, with investors buying the safe-haven asset as stocks plunged. Trade was moderate on the Tokyo exchange's first section, with 2.3 billion shares changing hands, compared with last week's daily average of 2.1 billion. Declining shares beat advancing ones, 836 to 819.