Japan's Nikkei plunges 5.4% as investors flock to safe haven assets

The Nikkei has slumped 15 percent so far in 2016.

Japanese shares plunged on Tuesday as investors fled for safe haven assets following a global sell-off overnight triggered by low confidence in European banks.

Yield on key Japanese government bonds narrowed as investors flocked to secure assets, especially the 10-year paper.

The Nikkei dived 5.4 percent to mark the biggest drop in nearly three years. The losses were led by banking behemoths, with Nomura Holdings and Mitsubishi UFJ Financial Group both down around 9 percent.

The Nikkei ended at 16,085.44 points, marking the biggest loss since mid-2013. The Nikkei has slumped 15 percent so far in 2016.

The sharp fall in Japanese banking sector stocks followed a similar global rout on the previous day.

Japanese investors are also worried over a stronger yen, as they know this will affect the profitability of Japanese exporters.

"The market is starting to digest that (BOJ's announcement) further and starting to relook at the potential implications not just for financials but for the broader economy, and the fact that the BOJ is running out of policy measures is one thing," Kei Okamura, an analyst at Aberdeen Investment Management told Reuters.

Diminishing faith in Japanese central bank's monetary policy tweaks, a sustained fall in oil prices and concerns over a weakening of Chinese economy -- all these factors have played a role in pulling down Japanese stocks since the beginning of the year.

Exporters, hit by a stronger yen, were hammered as well. Toyota Motor Corp lost 6.1 percent, Honda Motor 6.7 percent and Nissan Motor dropped 7.2 percent.