AKIPRESS.COM - Japan has emerged as the biggest victim in Asia of a sudden jump in global volatility, with the country’s stocks plummeting, and investors rushing to the safety of bonds and the yen, reports Bloomberg.

Stocks in Tokyo fell over 2% Thursday, extending a rout to 10% from this year’s high late last month and ranking as Asia’s worst market this year and one of the world’s biggest decliners. Safe-haven government bonds soared, sending the yield on the 10-year note to the lowest in 18 months while money managers also fled the falling dollar, pushing the yen up as much as 1.7%.

The trigger for the sudden fear in Japanese markets has been the wild swings in U.S. stocks and Treasuries as a global selloff accelerated this week. But investors also point to the marked divergence of monetary policy between the U.S. and Japan, spurring the magnified moves in Tokyo.

While the Federal Reserve is debating how soon it can lift interest rates, the focus in Tokyo is whether the Bank of Japan will introduce additional easing measures to spur the lackluster economy that recently contracted despite government efforts to lift it from years of stagnation.

“At the heart of all this is that there is now a risk of sharp slowdown in both the domestic and overseas economies—there is even concern that the Japanese economy may have fallen into a mini-recession,” said Akito Fukunaga, director of bond research at Barclays. “People are taking note of deterioration in economies and starting to act accordingly.”

He says yields on government bonds are likely to trade within a range of 0.43% to 0.50% for the rest of this month. On Thursday, yields on 10-year government bonds went as low as 0.47%.

“Market participants share worries around the global economy going forward and that means that Japanese [yields] will likely remain low for quite some time,” said Naruki Nakamura, head of fixed income at BNP Paribas Investment Partners Japan. Mr. Nakamura says he expected yields to rise in the first half of this year, but changed his view in July and bought seven, eight and 20-year Japanese government bonds. “It’s not like I suffered a lot but I must say I missed the opportunity,” he said. Mr. Nakamura now expects yields to remain at these levels into 2015.

By contrast, many of Asia’s emerging markets like India and Indonesia, which are often deemed to be riskier bets because of their fragile finances, have barely been dented. That is a reversal from last year when they were front and center of a global selloff, with investors this time around saying improving growth and expected reforms are still intact in these fast-growing countries.

The hit to Japan shows just how closely linked it is to global sentiment, especially as the rising yen typically hammers Japanese stocks because it hurts the profits of Japan’s big exporters like Honda Motor Co Ltd and Toshiba Corp., which were down over 3% Thursday.