- Bernanke said the Fed could start slowing the pace of its $85bn-a-month asset purchases
- Asian shares outside of Japan also retreated after they got their first chance to react to Fed comments
- The index had been comfortably in positive territory in early trading, rising as much as 1.8 per cent
Global stocks are in sharp retreat, led by a savage plunge in Tokyo, as traders are spooked by the prospect of reduced central bank support and a slowing Chinese economy.
The six-month rally in the Nikkei 225, which had seen the Tokyo benchmark surge about 80 per cent on hopes for government and Bank of Japan stimuli, cracked, with the index ending down 7.3 per cent, its biggest daily drop in two years.
The index had been comfortably in positive territory in early trading, rising as much as 1.8 per cent. But a broad afternoon sell-off ensued as volatility in the Japanese bond market and a rising yen encouraged wholesale profit-taking.
The yen has strengthened from Y103.6 to Y101.56 against the dollar in a matter of hours, while yields on Japanese government bonds tracked lower as investors sought refuge in credit markets. Yields on 10-year JGBs hit 1 per cent for the first time in a year in the opening minutes of Tokyo trading, but fell back to 0.85 per cent by late afternoon.
Asian shares outside of Japan also retreated after they got their first chance to react to Federal Reserve chairman Ben Bernanke's comments that monetary stimulus could be scaled back.
Mr Bernanke said the Fed could start slowing the pace of its $85bn-a-month asset purchases "in the next few meetings", but only if the employment market showed sustained improvement.
The minutes of the Fed's last meeting, revealed shortly before Mr Bernanke spoke, showed a "number" of officials were ready to start tapering off the central bank's third round of quantitative easing as early as June.
Further pressure on markets came from news of China's slowing manufacturing activity. The flash HSBC Purchasing Managers' Index for May fell to 49.6 from 50.4 in April, the first contraction in seven months. Later, PMI data for the eurozone was marginally better but still pointed to the bloc's economy contracting in the second quarter.
The Shanghai Composite dipped 1.2 per cent, the Hang Seng index fell 2.6 per cent and the ASX 200 in Australia lost 2 per cent.
The FTSE All-World equity index, which this week hit a near five-year intraday high of 252.0, is down 1.3 per cent on the session to 245.7 as the FTSE Eurofirst 300 endures a 2 per cent loss and US index futures suggest the S&P 500 will slip 16 points to 1,639.
Across asset classes the mood has shifted to "risk off". Growth-focused products are stumbling, with copper off 2.7 per cent to $3.29 a pound and Brent crude falling $1.06 to $101.54 a barrel. "Commodity currencies" are in retreat, pushing the Australian dollar to a multi-month low of $0.9629.
The corollary is the movement of funds into some perceived havens. Ten-year US Treasury yields are down 6 basis points to 1.98 per cent, while gold is up $10 to $1,379 an ounce.