The Nikkei hits a new 20-year low
Just days ahead of a war, the US and Japan are prepared to co-operate to support the financial markets if there is a crisis.
A deal was struck last week in the US between a former Japanese finance minister and the head of the US central bank, the Federal Reserve's Alan Greenspan.
"There was an agreement between Japan and the US to take action co-operatively in foreign exchange, stocks and other markets if the markets face a crisis," Chief Cabinet Secretary Yasuo Fukuda said.
The move came as Japan's key Nikkei 225 index dropped to another 20-year low, falling about 1.5% to hit 7,824.82, before rebounding.
Finance and economics minister Heizo Takenaka said the Bank of Japan and stock exchanges would be watching the markets closely during the current Iraq crisis.
Economic troubles
"We will follow the prime minister's instructions, co-operate with the Bank of Japan and exchanges, and respond appropriately," he said.
The looming war comes as Japan's economy continues to struggle with weak domestic demand, record unemployment and a third year of deflation.
Stronger exports also look threatened as the weakening of the dollar has pushed up the yen.
Japan's Financial Services Agency has already announced a number of measures to support the markets including easing rules on companies to buy their own shares.
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