With a big proportion of Asia's stock market activity closed for the Chinese New Year holiday, trading remained fairly thin in the region. But in Japan, traders on Tuesday took their lead from New York and Europe where banking shares were hit hard a day earlier.

In Germany for instance, the blue-chip DAX index had ended below the 9,000-point threshold for the first time since October 2014.

The benchmark Nikkei-225 dropped 5.4 percent at the Tokyo Stock Exchange to close at 16,085.44 points, marking a 20-percent fall from its highs in the summer of last year. The eye-watering fall was the steepest in percentage terms since June 2013.

Banking worries

Financials led the plunge as a slowdown in the world economy raised the prospect of loan defaults and lower interest rates eating into lenders' bottom lines.

Financial giant Mitsubishi UFJ and rival Sumitomo Mitsui Financial Group were among the stocks hit hardest by the latest rout in Tokyo.

"Investors are pricing in that central banks can no longer control markets," Daiwa SB Investments strategist Soichiro Monji told Bloomberg News. "We had a bubble in people's expectations of the power of central banks, and now we're seeing that bubble burst."

Underscoring a flight to safety, Japanese government bond yields dived below zero, extending a downtrend sparked by the Bank of Japan's surprise move last month to slap a negative interest rate on some commercial lenders' deposits.

hg/pad (Reuters, AFP)