U.S. the focus in markets as Nikkei joins selling

LONDON Japanese shares dropped sharply Thursday as the country's investors responded to the big falls posted around the world in the previous session. Trading in markets elsewhere was fairly insipid ahead of key U.S. economic data.

Japan's Nikkei index tumbled 5.2 percent to close at 13,589.03, the latest in a series of eye-popping falls. Though the Nikkei remains around 30 percent higher for the year, it's down 13 percent from its peak on May 22. Japanese investors appear to be increasingly doubtful over whether the government's economic strategy can extricate the country from years of economic malaise despite a previous bout of euphoria.

The main reason why the Nikkei is still up strongly this year is the optimism that was initially generated by the Bank of Japan's aggressive new monetary stimulus. The prospect of more yen in circulation weighed on the currency, which has fallen sharply to the relief of the country's exporters. Some of that fall appears to be unwinding, and the yen is trading off its lows - by late morning London time, the dollar was 0.3 percent lower at 100.88 yen.

Despite the sharp falls in Tokyo, trading elsewhere has been muted.

European shares recouped some of Wednesday's losses with the FTSE 100 index of leading British shares up 0.2 percent at 6,637. Germany's DAX rose the same rate to 8,355 while the CAC-40 in France was 0.4 percent higher at 3,991.

Wall Street was poised for a flat opening though much will likely hinge on figures released later -- Dow futures were unchanged while the broader S&P 500 futures fell 0.1 percent.

"Over the last couple of weeks, the negativity in Asia has followed through to the European session, but we're not seeing this today," said Craig Erlam, market analyst at Alpari. "Instead we're essentially seeing investors sit on the sidelines and see how things play out. Investors are clearly a very cautious at the moment, especially ahead of some major economic releases in the U.S. this afternoon."

The key focus later will likely be the second estimate of first quarter U.S. economic growth as well as weekly jobless claims.

The figures will be analyzed in terms of what they do to Fed policy. On Wednesday, investors were roiled by concerns that the Fed will start reducing the amount of financial assets it buys each month in an attempt to lower long-term interest rates and shore up the U.S. economic recovery. That new money has found its way into financial markets and given a number of assets, such as stocks, a big push.

"The key focus today will be on U.S. GDP which is expected to underpin the ongoing U.S. recovery with a 2.5 percent growth rate expected," said Brenda Kelly, senior market strategist at IG. "Any deviation from this number would be interesting and confounding; given the market obsession with Fed easing a better-than-expected number could well be equity-negative."

It will also be interesting to see the response in currency markets to the figures. Though the prospect of a change in Fed policy has helped the dollar advance across a range of currencies over recent weeks, its advance has gone into reverse this week as traders book profits. The euro, for example, was up a further 0.3 percent Thursday to $1.2984.

Earlier in Asia, Hong Kong's Hang Seng shed 0.3 percent to 22,484.31 while Australia's S&P/ASX 200 dropped 0.9 percent to 4,930.70. China's Shanghai index fell 0.3 percent to 2,317.75.

Oil prices drifted lower, with the benchmark New York rate down 65 cents at $92.48 a barrel.