Japanese shares are dependent on export performance

The yen, which has been steadily gaining over the past two years, rose by 2% to almost 111 yen in the dollar, after reports at the weekend indicated that the central bank could do nothing to stem further gains.

The G7 group of rich nations, currently meeting in Dubai, called for market forces to set exchange rates - a statement that some interpreted as dissuading Japan from intervening in the markets.

There are also reports that the Japanese central bank has already spent the $70bn it had set aside to help push down the yen, and so is powerless to do more.

A weaker yen, economists say, would be a great boost for Japan's struggling economy, since it would allow the country's mighty exporters to compete more effectively.

Money worries

The Nikkei ended down 463.32 points - or more than 4.2% - at 10,475.10.

Shares had briefly bounced back after Prime Minister Junichiro Koizumi earlier announced a cabinet reshuffle aimed at getting economic reform in gear.

But concern over the yen is currently the main preoccupation of investors.

There had been hopes that the G7 meeting would produce some specific remedy for Japan's plight, and possibly even an international commitment to a stronger dollar, or weaker yen.

But ministers in Dubai refused to be so specific, and the mood was further soured after new Finance Minister Sadakazu Tanigaki said there would be no change in foreign exchange policy.