Historic Selloff in Japan's Stock Market

Haunted by a potential nuclear catastrophe and contemplating the economic impact of the world's fourth-worst earthquake on record, Japan’s Nikkei 225 plummeted more than 10% on Tuesday, giving the market its worst two-day performance in almost a quarter century.

Selling in Japan gained serious momentum after Prime Minister Naoto Kan warned of “very high” radiation at a troubled nuclear power plant and a “very high risk of more radiation coming out.” While new data from the International Atomic Energy Agency suggest radiation levels at the Fukushima Daiichi nuclear power plant, the damage on market psychology was already done.

“Nobody knows what’s going on and if anyone says they know, they’re lying,” said Joe Saluzzi, co-head of trading at Themis Trading.

The Nikkei 225, the Japanese equivalent of the Dow, plummeted 10.55% to 8605.15 – its lowest close since April 28, 2009. The one-day selloff, which left all 225 members of the benchmark index in the red, was its steepest since an 11.4% plunge on October 16, 2008 -- during the height of the financial crisis.

“Today we see a massive and complete washout overseas -- specifically in Asia,” Peter Kenny, managing director at Knight Capital Group, wrote in a note.

To put the selling into perspective, the Dow Jones Industrial Average would have to suffer a meltdown of 1,271.27 points on Tuesday to match the Japanese stock crumble. In 2008 when the U.S. House of Representatives initially voted against the controversial $700 billion bailout plan, it fell 777 points.

Tuesday's plunge was even more striking because it came just a day after the Nikkei tumbled 6.2% in its first reaction to the recently-upgraded 9.0 earthquake that rocked Japan on Friday. Japanese markets closed last week just minutes after that earthquake struck and well before the tsunami and nuclear crisis paralyzed the nation.

The two-day slump for the Nikkei is the index’s worst since the Black Monday global market crash in October 1987 that ripped 508 points, or 22.61%, from the Dow.

“People really don’t know what to make of this. When you have that kind of uncertainty, the first reaction is to sell. That’s the prudent thing,” said Saluzzi.

Big-name companies that are based in Japan tumbled amid the confusion, with Sony (NYSE:SNE) diving 6% and Toyota (NYSE:TM) retreating almost 5%.

While it attempts to avert a nuclear catastrophe, Japan is still assessing the damage done by the earthquake and enormous tsunami. New estimates released Tuesday show the death toll has topped 3,000, with many more missing. It's not clear how much economic damage the disaster has caused on Japan, which is the third-largest economy in the world.

According to provisional estimates released by Barclays on Tuesday, damages could exceed 15 trillion yen, or 3% of Japan's gross domestic product.

The Japanese selling spilled into other markets as the Dow lost 216.61 points, 1.81%, 11776.55 and the Nasdaq Composite slid 2.74%.

In Europe, Germany’s DAX lost 4.82% and France’s CAC 40 declined 3.99%. Asian markets also retreated, with Hong Kong’s Hang Seng sinking 2.86% and China’s Shanghai Composite losing 1.41%.

Commodities also suffered selling, with crude oil losing the most ground since October 19. Crude was recently off $3.89 a barrel, or 3.84%, to $97.30. Copper slid 1.83% a pound to $4.11.