Even some of the hyperviolent Japanese anime don't get quite this ugly. Japan's Nikkei 225 (the major Japanese equity index, roughly akin to Britain's FTSE 100 or the S&P 500) fell another 4%-plus last night, bringing the recent carnage close to 20%.

How bad was it? Of the 225 stocks on the index, only three closed up -- Kao, ChugaiPharmaceuticals, and Sky Perfect. Three out of 225. Ugly. And while each of the industry groups included in the Topix (another Japanese index, broader than the Nikkei 225) declined, it seems as though the pain was concentrated in technology and automakers.

That latter bit certainly reflects a part of the underlying story. When stocks like Toyota (NYSE:TM), Matsushita (NYSE:MC), and Sony (NYSE:SNE) are down, it's often on worries that economic conditions in the U.S. (and increasingly, in the rest of Asia) are going to start crimping Japanese exports.

I think there's more than that going on, though. Matters certainly weren't helped by the revelation that Japan's version of the head of the Federal Reserve (Bank of Japan Governor), Toshihiko Fukui, had an investment in a hedge fund whose manager has recently been arrested on charges of insider trading. While the investment predates Fukui's position as governor, you can probably imagine how well it would play in this country if Alan Greenspan had been an investor in Enron or Long Term Capital Management. And though I think a lot of Americans have become numb to scandal and quasi-corruption in the equity markets, many Japanese had continued to think their markets were different.

Last and not least, don't underestimate the power of simple panic. While it's certainly true that the Japanese market had enjoyed a good run, a lot of the data suggested that it was foreign money that was pushing up the stocks. In other words, the locals weren't quite as keen on their own shares as American fund managers were. Now that the markets are breaking and managers are shifting into CYA mode (if you're not familiar with that acronym, the first two words are "Cover Your"), that money is coming right back out.

Far be it for me to say that rising interest rates and global commodity inflation aren't valid reasons to be cautious. By the same token, buying when others are frightened is often a good way to secure bargains. For those not comfortable enough with individual Japanese equities, take a look at the iShares MSCI Japan Index (NYSE:EWJ) and perhaps the closed-end Japan Smaller Cap Fund (NYSE:JOF).

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).