The Nikkei 225 index fell by nearly 550 points to 18,896, taking its decline since the start of last month to 12 per cent - or about as much as Wall Street has risen over the same period. Analysts predicted that Japanese shares would slide even further as investors continued to move funds overseas for higher returns.
Jesper Koll, Tokyo economist for investment bank JP Morgan, said: "The level of interest rates is so close to zero that everyone from Mrs Watanabe to Fortune 500 companies are putting their assets to work in another currency."
Hiroshi Mitsuzuka, Minister of Finance, joined the chorus of ministers and officials trying to talk the currency markets out of sending the yen even lower against the dollar. It fell to 117, its lowest level against the US currency for four years, in Tokyo trading yesterday before recovering slightly. "We want exchange rates to stabilise. We will continue to act properly against excessive currency movements," Mr Mitsuzuka said.
The yen's recent decline reflects subdued prospects for the economy. The Japanese government recently predicted that the economy would expand by 1.9 per cent in the year from 1 April, its lowest official forecast ever, while the OECD has forecast GDP growth of 1.6 per cent this calendar year. Yesterday Salomon Brothers in Tokyo predicted expansion of less than 1 per cent.
Gerard Lyons, an economist at Japanese bank DKB, said: "The economy has been locked into a low growth path and it is not going to break out of it any time soon." The need for structural reforms was offsetting any cyclical upturn in growth, he said, with deregulation squeezing profits and triggering cost-cutting by Japanese companies.
There is little hope that the government can act to offset this economic frailty. Official interest rates, at 0.5 per cent since September 1995, are as low as they can be.
The recent budget has tightened fiscal policy, in the light of a deficit amounting to 4 per cent of GDP and a looming state pensions crisis.