Japanese stocks had their worst slump since they entered a bear market a month ago, after a poor U.S. manufacturing reading rekindled worries about a U.S. recession, while a selloff in global tech shares and a firmer yen also weighed on sentiment.

The blue-chip 225-issue Nikkei stock average declined as much as 4.7% before closing down 4.2%, the biggest drop since the 12% crash on Aug. 5. The loss was led by chipmakers such as Disco after Nvidia extended losses in after-hours trading on news it received a subpoena from the U.S. Justice Department. The broader Topix lost 3.7%.

Resource-related stocks were pummeled by falling commodity prices, with trading house Mitsui & Co. declining 6% while poor U.S. manufacturing data hit shares of machine-makers such as Fanuc.

¡°You can see the AI-driven rally is over,¡± said Tomoichiro Kubota, a senior market analyst at Matsui Securities. ¡°The decline in commodity prices is stoking worries about recession.¡±

Japanese stocks went from one of the world¡¯s top performing market to the epicenter of a global meltdown on Aug. 5, with the Topix posting its worst day since October 1987. The volatility was fueled by a stronger yen, triggered by the Bank of Japan¡¯s surprise rate hike on July 31, and concern over the U.S. economy ¡ª both also seen as reasons for the selloff Wednesday.

¡°The sharp move in Japanese equities following the U.S. selloff overnight not only highlights the link between these markets, but also the high negative correlation between the yen and local equities,¡± said Alvin Tan, head of Asian currency strategy at Royal Bank of Canada in Singapore. ¡°It tells you that much of the bull market in Japanese equities has been tied to a depreciating currency, for better or for worse.¡±

Concerns over higher borrowing costs in Japan resurfaced after Gov. Kazuo Ueda reiterated the BOJ will continue to raise rates if the economy and prices perform as expected. His comments helped the yen retain a 1% gain against the dollar from Tuesday, keeping alive concerns over exporters¡¯ earnings.

Ueda¡¯s comments weighed on Japanese shares, said Rafael Nemet-Nejat, a senior portfolio manager at Jin Investment Management. ¡°Moreover, fears of a recession in the U.S. also reemerged on the back of the weaker ISM,¡± he said, referring to a contraction in the Institute for Supply Management¡¯s manufacturing gauge.

Some analysts see Wednesday¡¯s drop as a temporary reaction than a start of another meltdown.

¡°Today¡¯s fall is just a reaction to big drop in New York shares overnight,¡± said Kohei Onishi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. Equities will likely rally toward the year-end once uncertainties around events including economic data are removed leading...