The benchmark Nikkei average tumbled 3.7% to 21,142.96, its lowest closing level since Sept. 5.
The index was down 9.6% for the week, the biggest in four years. For the month, it was down 8.9% – the worst in 14 months.
Looking ahead, analysts say the Nikkei could be supported around 20,700, where it will be traded on par with its book value.
The Nikkei’s volatility index, a measure of investors’ volatility expectations based on option pricing, spiked to as high as 42.85, its highest level since June 2016.
An increase in volatility prompts automatic selling by “risk-parity” funds, which target a constant level of volatility, as well as trend-chasing commodity trading advisers (CTA), and often exacerbates turbulence in prices.
Analysts said such selling should already be happening, since market saw volatility spikes over the past four trading days.
The broader Topix shed 3.7% to 1,510.87, its lowest since early September, in very active trade, with the volume hitting the heaviest since May 2018 at 4.13 billion shares, partly due to MSCI’s quarterly index rebalance.
In a sign of broad-based selling, all of the 33 sector sub-indexes on the Tokyo Stock Exchange were trading lower, with real estate, information and communication and fish and forestry being the worst three performers.
Semiconductor-related and other cyclical shares were hit hard, with Tokyo Electron Ltd and Screen Holdings Co Ltd declining 5.5% and 5.0%, respectively.
Blue-chip automakers Toyota Motor Co shed 3.5% and Honda Motor Co Ltd lost 4.3%.
Electronic parts makers Murata Manufacturing Co Ltd and TDK Corp dropped 4.8% and 4.0%, respectively.
“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“But at the moment, no one can tell how long this will last and how severe it will get.”
World Health Organization Director General Tedros Adhanom Ghebreyesus said the virus could become a pandemic as the outbreak spreads to major developed economies such as Germany and France.
Elsewhere, the index of Mothers start-up shares plunged 6.3% to hit a fresh 4-year trough.
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