Stocks, Yen Fall Sharply in Tokyo Markets : Plunge: The 4.5% loss in securities and the Japanese currency drop prompted fears that a “vicious cycle” might be starting.

The Tokyo stock market and the Japanese yen plunged today, prompting worries of a “vicious cycle” in the securities and foreign exchange markets.

The market closed at 33,321.87, down 1,569.10 points, or 4.5%.

The key Nikkei index of 225 stocks had tumbled by 1,459.79 yen--or 4.2% in value--to 33,432.18 by the end of morning trading.

Matters got worse in the afternoon as Tokyo share prices continued their rapid descent. The Nikkei index at 1:46 p.m. in Japan was down 2,047.34 points, or just over 6%, to 32,843.63. After the central bank of Japan started moving to prop up the yen, the index bounced back to 33,128.18 by 2:42 p.m. for a decline of more than 5% on the day.

If maintained at that level, the decline would have been the second biggest ever in the Tokyo stock market, eclipsed only by the 3,836-point decline on Oct. 20, 1987, when markets worldwide were plummeting. A day earlier, the Dow Jones industrial average fell 508 points for its biggest decline ever.

The yen, meanwhile, plummeted to 148.50 to the dollar, a drop of 2.03 points, or 1.4% below Friday’s close. That is the lowest point for the yen in the past 5 1/2 months.

To keep the yen from falling even further, the Bank of Japan sold $1.3 billion of U.S. currency, according to market sources quoted by Reuters news agency. The Japanese central bank is concerned about keeping the dollar from rising above the 149 yen, the sources said.

The troubles in the financial markets come amid mounting concerns over worsening trade friction between the United States and Japan, expectations of higher interest rates and uncertainty over the domestic political situation in Japan.

The potential impact on the American stock market is uncertain, analysts said. Although troubles in the Tokyo market last week caused major disruptions in European exchanges, the U.S. stock market was only modestly affected.

Coming on top of two dramatic stock market declines last Wednesday and Friday, the precipitous fall today spurred Finance Minister Ryutaro Hashimoto to confess for the first time that he was “very worried.” But he declared only that he was carefully watching developments on both the stock and the foreign exchange markets.

Hashimoto insisted that the “fundamentals” of Japan’s economy remain sound. But investors, he complained, are focusing on news reports of uncertainties in political developments in Japan, where the ruling party won a convincing victory in a lower house election Feb. 18, but lost control of the upper house in an election for that chamber last July.

In addition, he added, investors are worried about the outcome of U.S.-Japan negotiations on sensitive trade issues. Some analysts believe the two nations are on a collision course.

Two days ago, Prime Minister Toshiki Kaifu accepted a surprise invitation from President Bush to travel to Palm Springs on Friday and Saturday for an emergency bilateral summit that is expected to focus on the so-called Structural Impediments Initiative talks.

American trade negotiators argue that structural barriers in the Japanese economic system are blocking a free flow of U.S. exports to Japan. Japanese negotiators argue that American trade problems are largely of the United States’ own making, given its relatively low savings rate and high budget deficit.

Mounting economic frictions have led to frequent criticism of Japan in the United States. In Japan, there is growing resentment of what are viewed as high-handed American demands.

Also likely to be discussed in the meeting between Bush and Kaifu are threats of retaliation that the United States has made if Japan fails to open its markets to forestry products, communications satellites and supercomputers.

Japanese government officials said privately that a “vicious cycle” had set in which stock price declines depress the yen, and decreases in the yen’s value drive down stock prices.

Stock authorities were reported to be planning to ease terms of credit allowed for stock purchases, and the Finance Ministry was purchasing government bonds to raise their prices and keep interest rates on other instruments from rising further.

At the end of morning trading on the stock exchange, about 15% of orders to sell stock had not been matched up with orders to buy stock. Brokers confessed that they were unable to predict how far prices might fall.