The second bout of heavy selling in Japanese stocks in as many weeks is not just about a strengthening yen and pulling-back from lofty levels, traders say.
There's also nervousness that upcoming U.S. data could signal an early unwinding of the Federal Reserve's asset-buying program.
The Nikkei closed Asia trade down more than 5 percent at 13,555,its lowest level in a month. It has fallen just over 15 percent from a 5-1/2 year high set last Thursday, just before the Nikkei went on wild swing later in the day to plunge more than 7 percent after weak Chinese data sparked a bout of profit taking.
"We are all looking at the Nikkei right now and this 5 percent drop is a shock," said Desmond Chua, a markets analyst at CMC Markets in Singapore.
"You could say it's brought on by the stronger yen, but it's also about the U.S. data coming out tonight (Thursday) and nervousness ahead of that," he added, referring to the yen which has strengthened about three percent over the past week.
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U.S. data coming out later on Thursday include weekly jobless claims and a preliminary estimate of first-quarter gross domestic product (GDP). Economists polled by Reuters forecast the U.S. economy grew at an annualized pace of 2.5 percent, unchanged from an advanced estimate.
Markets globally, already on edge about the prospect of the Fed unwinding its quantitative easing program later this year, are increasingly sensitive to U.S. data, analysts said.
In the case of the Nikkei, those jitters are also encouraging investors to take profits on this year's double-digit gains.
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"If tonight, we get good data then that will fuel talk about QE tapering and hit stock markets globally," said Kelly Teoh, markets strategist at IG Markets.
"We think the Nikkei will end the year higher, but there're just lots and lots of profit taking right now," she said, adding. "It's bloodshed."
Ben Collett, head of Asian equities at Sunrise Brokers in Hong Kong, said that those investors who had hoped for a rebound after the slide in the Nikkei exactly a week ago have been left disappointed and were bailing out of their positions, exacerbating the tumble.
"The guys that haven't sold in the first leg are getting drawn in," he said.
The market has witnessed heightened volatility in the past week, swinging between heavy gains and losses almost on a daily basis.
Collett foresees heavier losses in the market over the coming days. "We would look to re-enter the market at 13,100, if it keeps going down,we won't step in again until around 11,300," he said.
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One trader said that he had seen an uptick in the number of short positions on the Nikkei.
CMC's Chua said the Nikkei was hovering close to key chart support at the 13,500 area and a break through that level could see Japan's stock market fall to 12,000 and levels not seen since early April.
—By CNBC's Dhara Ranasinghe and Ansuya Harjani