What caused Japan's stock market to tumble? 3 theories

After months of soaring prices, Japan's Nikkei stock index plunged 7.32 percent on Thursday, the largest one-day drop since the country's 2011 tsunami and nuclear disaster. All 225 companies on the index saw their share prices fall, with some, such as Mitsubishi, slipping double digits.

It was a such a dramatic dive that jitters quickly spread to markets in Australia, Hong Kong, and South Korea, before hopping to Europe, where stocks in London, Paris, and Frankfurt dropped more than two percent. This morning, U.S. markets dipped in early trading, before eventually recovering.

So what caused global markets to shudder? Here, three factors:

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1. A shaky economic report from China:

A preliminary report on Chinese manufacturing showed that in May factory activity slowed for the first time in seven months. Specifically, HSBC's purchasing manager's index fell to 49.6 — just below the 50 mark that demarcates between expansion and contraction.

As CNN notes, "The strength of manufacturing in China is considered a barometer of the global economy because of the nation's role as a powerhouse exporter."

Indeed, China has largely powered the global economy in the post-crisis era, making up for significant slack in Europe and the U.S. Any sign of a slowdown there is cause for concern, particularly for Japan's export-dependent economy, which is particularly vulnerable to the ups and downs of other economies.

2. Dark speculation about the Federal Reserve:

This week, Fed Chairman Ben Bernanke told Congress that while he had no plans to halt the central bank's $85 billion-a-month stimulus plan, he would consider winding it down "as the economic outlook improves."

"A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery," he said.

At first, Wall Street responded favorably. But the positive vibes quickly dissipated. Here's the New York Times:

Markets have come to rely heavily on the Fed's quantitative easing program, which has seen the central bank flood the money supply by purchasing hundreds of billions of dollars worth of assets and securities. Any pull-back would force investors to adjust after years of record-low interest rates, and leave the U.S. economy without a huge crutch. And again, a weaker U.S. economy is bad news for Japan — someone needs to buy those televisions and cars.

3. A natural correction:

Some think the Nikkei's plunge was the inevitable result of a months-long surge driven by the Japanese government's extraordinary economic recovery program — a fiscal policy known as Abenomics, after Prime Minister Shinzo Abe. Between November 2012 and January 2013, the Nikkei Index had jumped 2,300 points, with little correction.

Here's Larry Elliot at the Guardian:

Elliot wasn't the only one to compare the fall to the 2008 financial crisis. Société Générale foreign exchange strategist Sebastien Galy in an email to Business Insider called the 7 percent slip a "Lehman-like" moment.