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Nikkei Dives on Stimulus Jitters

Tickers in this article: NI225

NEW YORK (TheStreet) -- Japan's Nikkei index plunged the most in six weeks on Wednesday, a day after closing at a near six-year high. Volatility in the country's stock market was triggered by dour comments about further monetary stimulus, which has fueled gains of 63% over the past year.

The Nikkei shed 2.17% on Wednesday to close at 15,407.94 after Bank of Japan board member Takehiro Sato said more monetary easing would not help boost inflation expectations - dampening hopes for more stimulus. The index's weak performance comes a day after Bank of Japan governor Haruhiko Kuroda told a conference on Monday "we are ready to adjust monetary policy without hesitation if risks materialize." His comments pushed the yen to a six-month low and bolstered the Nikkei to a near six-year high on Tuesday.

If Japan's sharemarket maintains its gains, it would be the Nikkei's best annual performance since 1972. Its currency has also appreciated nearly 25% over the past year - though investors remain skeptical on the sustainability of Japan's economic resurgence.

Since his election in December 2012, Prime Minister Shinzo Abe has used a combination of monetary and fiscal measures in a bid to restore growth to Japan's stagnant economy. 

While the Nikkei has surged and consumer spending has risen, Abe's biggest challenge is to ensure long-term growth through structural reforms, the so-called 'third arrow' of his policies. The first two arrows have seen a jump in government spending and commitment to achieve 2% inflation by boosting money supply.

Many fund manager nominate Japan as the most promising Asian market for returns next year, citing its still-nascent economic recovery and under-investment in its sharemarket by local institutional investors. 

--By Jane Searle in New York