TOKYO -- Shock waves triggered by the European banking sector reverberated through global markets Tuesday, sinking equities and bond yields as investors dashed for safety.
The Nikkei Stock average sank 918 points to 16,085 in its largest drop of the year. Yields on newly issued 10-year Japanese government bonds fell to zero for the first time ever after 10 a.m., entering negative territory two hours later.
Tokyo "will keep close watch on movements in the currency market," Finance Minister Taro Aso told a morning news conference. But as if to call Aso's bluff, the yen continued strengthening, breaking the 115 line against the dollar at one point in the day.
Europe was the epicenter of the turbulence. A report Monday said Deutsche Bank could have trouble making coupon payments going forward, sparking concerns about its creditworthiness. The stock's dive forced the bank to reassure investors that it had sufficient capacity to make interest payments.
Falling earning power has long been a concern for European banks. The institutions have started to focus on investment banking services. But demand for capital by European business is stagnant. Ultralow interest rates have further reduced banks' investment opportunities, while a tepid economic recovery has delayed the resolution of the bad debt problem.
Deutsche Bank booked a record net loss of 6.8 billion euros ($7.69 billion) for 2015. Restructuring and litigation costs eroded the bank's finances. Higher-than-expected losses from litigation and other costs going forward could deplete resources necessary to make interest payments, according to Simon Adamson of CreditSights.
Fears about the banking sector have spread to southern European nations with fragile financial systems, with Portugal chief among them. Yields on 10-year government debt there surged past 3.5% at one point Tuesday -- their highest since October 2014. The yield gap with German bonds was the widest since March 2014 at more than 3 percentage points.
The yield gap between 10-year Italian government bonds and German bonds crossed the 1.5-point threshold to reach its widest since July 2015. Spain's debt yields faced upward pressure as well, raising concerns that high interest rates could throw cold water on the nation's economic recovery.
U.S. markets are also volatile. Major shale oil developer Chesapeake Energy plunged 30% on the New York Stock Exchange amid bankruptcy rumors. Though the company issued a denial, the Dow Industrial Average sank as energy and high-tech stocks were sold, highlighting market sensitivity to any sort of bad news.
Fears of a global economic downturn lurk behind the drama. China and other emerging economies are slowing. Even the American economy, which had been expected to drive growth, is showing signs of weakness. "As investors became mindful of a worldwide downturn, funds flowed into U.S. and Japanese bonds," said Junichi Makino of SMBC Nikko Securities.
Others believe that the market reacted to the barrage of bad news with excessive pessimism. Federal Reserve Chair Janet Yellen's congressional testimony Wednesday and Thursday should help ease risk aversion if it gives an accurate picture of the U.S. economy, said Kazuhiro Miyake of Daiwa Securities.