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Shares in Japan tumble as investors worry about the global economy

Key Points
  • Shares in Japan sold off sharply.
  • The Nikkei 225 plunged more than 3 percent on the day.
  • The movements in Tokyo came after stocks stateside sold off on Friday as an inverted yield curve stoked fears that an economic recession is on the horizon.
  • Government data last Friday also showed Japan's annual core consumer inflation slowed in February, leaving its central bank in a bind.
A pedestrian walks past a stock indicator board for the Tokyo Stock Exchange in Tokyo on August 13, 2018.
Kazuhiro Nogi | AFP | Getty Images

Shares in Japan sold off sharply on Monday as investors grappled with concerns over the global economy.

The Nikkei 225 plunged 3.01 percent to close at 20,977.11, as shares of index heavyweights Softbank Group and Fanuc plummeted 5.01 percent and 3.84 percent, respectively. The Topix index also fell 2.45 percent to finish its trading day at 1,577.41.

That followed a sell-off on Wall Street Friday, as an inverted yield curve stoked fears that an economic recession is on the horizon. Disappointing economic data released Friday out of Europe, coupled with an economic downgrade by the Federal Reserve, added to those concerns.

The spread between the 3-month Treasury bill and the 10-year note turned negative on Friday — the first time in more than a decade. Investors consider this to be a signal that a recession may be coming soon.

At present, the central bank balance sheets among the G3 economies — the U.S., Japan and the European Union — are "bloated," they said. As a result, the difference in yield between holding a long-term bond versus a series of short-term debt was suppressed.

"However, this should not detract from the fact that the slowdown across the developed markets is deepening. While the US economy still seems to be on firm footing, guarding against downside risks has become the Fed's main priority (as opposed to policy normalisation). The Fed's dovish pivot over the past few months should help to cushion slowdown risks," they said.

Bank shares in Tokyo struggled on Monday, with Mitsubishi UFJ Financial Group falling more than 3 percent and Sumitomo Mitsui Financial Group declining 2.91 percent.

Inflation struggles

Government data last Friday also showed Japan's annual core consumer inflation slowed in February, leaving its central bank in a bind.

The Bank of Japan has battled low inflation rates for years, with its target rate of 2 percent remaining ever elusive despite attempts to accelerate price growth.

"I don't think anyone is going to blink if I suggest that inflation in Japan never will hit this target — at least not without external help from, for example, a consumption tax hike (though that's something else I don't think will now happen as the economy isn't strong enough and another postponement beckons)," Robert Carnell, chief economist and head of Asia-Pacific research at ING Bank, wrote in a note following last Friday's data release.

Carnell said that "a target that is consistently missed is, in economics, worse than no target at all."

"The whole point of these targets is that they should increase the central bank's policy credibility, which is useful if your policy tools are weak. In Japan's case, the unachievable target and its repeated misses on the downside actually detract from credibility, making weak tools even weaker," he added.

— CNBC's Fred Imbert contributed to this story.