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The plunge in the Nikkei accelerated in the afternoon, extending the benchmark's losses to nearly 15% since it hit a 5-1/2-year high on May 23, putting it well into "overbought" territory and leaving it ripe for profit-taking. It ended 7.3% lower the same day.
Fed Chairman Ben Bernanke said last week that the US central bank could decide whether to reduce its $85 billion in asset purchases every month at one of its "next few meetings," depending on economic data.
His comments pushed up Treasury yields to 13-month highs on Wednesday, prompting investors to cut back on high-dividend paying stocks in the United States and Asia. Singapore's real estate investment trust (REIT) index sagged a further 2.8% on Thursday after shedding 2.8% in the previous session.
"People are worried that a winding down of quantitative easing could end the generous supply of money, leading to a surge in interest rates and a downturn in stock prices and economies," Ryoji Musha, president of Musha Research in Japan, wrote in a report.
The spread between the dividend yield for Japan's Topix index and the yield on the benchmark 10-year Japanese government bond touched 0.654%, its lowest since March 2011, on May 22, the day before last week's selloff, according to Thomson Reuters Datastream.
It stood at 0.735% on Wednesday, the latest figure available.
Asian shares measured by the MSCI Asia-Pacific outside of Japan slipped 0.5% on Thursday, with the Singapore benchmark down 1.1%, Taiwan shares off 1.1% and Philippine shares shedding 3.8%.
High-yielding counters also fell in Hong Kong and Australia.
The Nikkei ended at its lowest since April 22, with index heavyweight Fast Retailing <9983.T>, the owner of casual fashion chain Uniqlo, sinking 11%.
"Hedge fund traders who want to drag down Nikkei futures would sell Fast Retailing as it has a big contribution to the index," said a dealer at a Japanese securities firm.
"It's algorithm trade. As soon as the market receives a signal that the stock is falling, other traders likely follow suit. That's how speculators pull down the market, and Fast Retailing is one of the stocks used as a tool in such trade."
The dealer added investors would buy Fast Retailing, which has the biggest weighting in the Nikkei, when they try to push the Nikkei higher.
Sell in May
Tokyo's Nikkei is down 2% this month, on track to snap a nine-month winning streak, its longest such run since 1993. Before last Thursday's selloff began, it was heading for a 10th straight month of gains, which would be its longest winning run since 1972.
Despite the recent selloff, the Nikkei is still up 10% since April 4, when the Bank of Japan announced a sweeping monetary expansion campaign to eliminate years of deflation and revive growth, and has risen 31% this year.
The magnitude of position reshuffling may be greater for the Nikkei, which has outpaced other Asian bourses by far so far this year. Benchmark indexes in Indonesia and the Philippines, both of which hit record highs this year, have shown 19% and 20% growth this year, respectively.
"Those who said Japanese stocks are appealing when the Nikkei was 9,000 are still saying that they are attractive even when the index was trading at 15,000. The market has become numb about its own valuations," said Chisato Haganuma, chief strategist at Mitsubishi UFJ Morgan Stanley Securities.
"People can get increasingly optimistic about the bull market, but as soon as the market started declining, they get scared to put buy orders," he said.
Japanese equities carry a 12-month forward price-to-earnings ratio of 16.3, up from 13.9 at the end of 2012 and almost level with its 10-year average of 16.4, data from Datastream showed.
That compared to 14.9 for Singapore shares and 14.8 for Taiwan stocks.
Chang Chiou Yi, regional strategist for ASEAN at CIMB Research, said: "These are unlikely to lead to a sharp rotation or underperformance in ASEAN. especially within Asia. The Philippines has indeed run up quite a lot and may be fully priced in for now, but the longer term outlook remains positive so not major shift in investment view."
