Japan's Nikkei average hit its lowest point since May 2003 on Thursday, then pared its losses to end down 2.5 percent after a report that the U.S. administration may consider a $40 billion proposal to help stop foreclosures. Honda Motor Corp and other exporters dragged on the market as the yen climbed against the dollar and the euro on growing worries about the global economy, while bank shares such as Mizuho Financial Group were also battered.
The Wall Street Journal said Federal Deposit Insurance Corp Chairman Sheila Bair is expected to suggest in a Senate Banking Committee on Thursday that the government give banks incentives to turn troubled loans into more affordable mortgages, according to a person familiar with her testimony.
The report sparked buying of U.S. stock futures,which in turn set off short-covering in Nikkei futures and helped the cash market trim losses, market players said.
The benchmark Nikkei shed 213.71 points to 8,460.98 after earlier falling as low as 8,016.61, its lowest in nearly five and a half years and down more than 7 percent.
It has lost 25 percent this month.
The broader Topix ended the day down 2 percent at 871.70 after earlier falling more than 6 percent.
"Given the sharp falls in U.S. stocks, it wouldn't be surprising for a report like this to be used as reason for a rebound there," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
"But it's hard to know what further land mines may lie ahead. If there'd only been one that'd be one thing, but they've been exploding all over the place."
Other market players were similarly wary, particularly after the dollar hit a seven-month low against the yen as deepening concerns about the global economy prompted institutional investors to dump risky overseas assets, while the euro hit a six-year low against the Japanese currency.
"The stronger yen is really a manifestation of a much bigger issue — the prospect of a deep recession," said Norihiro Fujito, general manager at the investment research and information division of Mitsubishi UFJ Securities.
"A particular worry for Japanese exporters is the prospect that emerging markets, which were growing so strongly, now appear to have reversed into a shrinking trend — and this will hit the earnings of Japanese companies far into the future, not just for the current financial year but the one beyond."
