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Nikkei dives on Fed fears

Tokyo -Tokyo stocks plunged more than 6% on Thursday morning after a Wall Street sell-off amid fears the US Federal Reserve will soon begin to wind down its massive stimulus drive.

The benchmark Nikkei 225 index dived 6.57% at one point before ending the morning session down 5.28% at 12 587.40, throwing the Nikkei into bear-market territory.

The broader Topix index of all first-section shares fell 4.09% to 1 051.67.

Japan's premier exchange has been hit by weeks of wild volatility after it soared to a five-year high above 15 600 in late May.

Dealers are running for cover, with the US Federal Reserve in focus ahead of a policy meeting next week that many fear will herald the end of its $85bn-a-month bond-buying. Central bank stimulus has been credited with helping boost global equity markets over the past several months.

Foreign investors had piled into the Tokyo market as a new government pledged to stoke the world's third-largest economy with big spending and aggressive monetary easing, which pushed down the yen.

"We have seen such wild fluctuations lately that few investors want to press on with buying," said Hirokazu Kabeya, senior strategist at Daiwa Securities.

"It's a kind of a chicken-and-egg situation - volatile markets keep buyers away and the absence of buyers leads to market volatility. We are trapped in a negative spiral right now."

Thursday's drop came as the dollar weakened further against the yen, bad news for Japan's exporters who benefit from a cheap currency when selling their products overseas.

Investors tend to flock to the safe-haven yen in times of turmoil and uncertainty, but a stronger yen tends to weigh on the Tokyo stock market.

"The Nikkei falls because the dollar/yen falls, then the dollar/yen falls further because the Nikkei has fallen - markets are in this vicious circle," said Atsushi Hirano, head of FX sales Japan at Royal Bank of Scotland.

The greenback fetched ¥94.67 in late morning trade in Tokyo, from ¥95.88 in New York late on Wednesday and from the high ¥98-range in Tokyo at the start of the week.

That puts the yen back to levels seen when the Bank of Japan announced in April it would unleash a torrent of easy money as part of a plan to reverse years of falling prices and tepid growth.

"A clear breach of 95 yen will open the pair's downside to 92 yen," Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo, told Dow Jones Newswires earlier in the day.

"This sense of uncertainty could persist until next week's FOMC meeting," he added, referring to the upcoming gathering of the policy-making Federal Reserve Open Market Committee.

US stocks fell sharply in volatile trade, with the Dow posting its first three-day losing streak this year amid worries about central banks' stimulus plans after the Bank of Japan held off fresh measures on Tuesday.

The blue-chip Dow shed 0.84 percent to 14,995.23.

The European Central Bank and Bank of England also held steady after their monthly policy meetings last week, and investors will keep an eye out for clues as to when the Fed will start tapering off its own programme.

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