The Nikkei stock market average tumbled 3 per cent to an 18-year low today.
The move sparked fears of financial instability in the world's second-biggest economy as a tentative export-led rebound sputters.
The Nikkei's slide, led by banks and other blue chips, jangled nerves in the Japanese government, which is struggling to keep alive a frail economic recovery as export growth slows and consumers remain too worried about their incomes to spend.
"It was only a matter of time until we fell this low," said Mr Masanori Hoshina, head of global portfolio marketing at the Japanese unit of French bank BNP Paribas.
"Part of our weakness lies in concerns about the cloudy economic outlook in the U.S. But the key problem is that there are still no signs of a sustainable economic recovery in Japan."
The Nikkei shed 3.2 per cent to 9,217.04, its worst finish since November 7th, 1983 when it ended at 9,216.21.
The Nikkei has now lost more than three-quarters of its value since the glory days of 1989 when Tokyo was worth more than the rest of the world's equity markets combined, and technical chartists say a key threshold of 9,000 was within sight.
The banking sub-index tumbled by more than five per cent, the second-biggest sector loser after the brokerage index on the Tokyo Stock Exchange's first section.
Weak stock prices fueled fears that Japan's banks, laden with 52 trillion yen ($444 billion) in sour loans, could suffer debilitating losses on their shareholding in the six months to September 30 when they declare their assets for the half-year.
Shares in Mizuho Holdings, the world's biggest banking group by assets, sank 9.24 per cent to 226,000 yen and rival Sumitomo Mitsui Banking Corp slumped 7.95 per cent.
The stock market losses stoked anxiety in Japan's debt and foreign exchange markets, causing some investors to sell dollars on worries that US stock prices would follow suit when Wall Street opens today after a market holiday on Monday.