Is the Abenomics honeymoon over?
The Nikkei's decline, which wiped out all the gains made by the index in May, is the second such dramatic drop in a week. Last Thursday, the Nikkei dropped 7%, its biggest single-day loss since the 2011 earthquake and nuclear disaster.
The index is now more than 10% off its peak and in a technical correction.
Investors had in recent months largely cheered the fiscal and monetary policy changes ushered in by Prime Minister Shinzo Abe and central bank chief Haruhiko Kuroda.
Two of Abenomics' three policy pillars are already in place. Japan has ramped up government spending and the central bank is injecting money into the economy on a massive scale. Abe is working on a slate of structural economic changes designed to make the country's labor market more flexible and encourage women to enter the workforce.
The Nikkei, which has turned in the best performance of any major index this year, is still up by nearly 60% since May 2012, and has rallied 27% since January. The yen has also weakened dramatically since Abe took office, and remains about 30% off its peak against the U.S. dollar.
Yet it's not clear that the excitement is translating into all parts of the economy. Wages are flat, while retail sales and industrial production indicators have also failed to impress.
Some analysts say the stock market is overbought. Others doubt that a doubling of the monetary base by the Bank of Japan will be able to reverse decades of persistent deflation without unnerving the country's huge bond market and pushing up borrowing costs.
With equities markets in turmoil, the yen has strengthened some in recent days. Exporters, which tend to benefit from a weaker yen, have been among the hardest hit stocks.
Shares of export-dependent Honda fell 3.4% on Thursday. Toyota, which had forecast higher profits as the yen declined, lost 2.3%. Fast Retailing, the operator of the popular Uniqlo brand, dropped 11.1%.