By Brad Frischkorn TOKYO--Tokyo stocks plunged to a two-month low Monday, ricocheting off a sharply lower Wall Street over signs that an end to the U.S. Federal Reserve's easy money policy could hit China and other emerging economies. The Nikkei Stock Average ended down 2.5% with trading volume hitting its highest level so far this year. The index has now surrendered 4.4% over the last two sessions, and is now off nearly 8% to start the new year. "This kind of selloff has been a long time coming since much of the global equity markets' growth has come on the back of 'artificial' easy-money policy," says Tachibana Securities market analyst Kenichi Hirano. "The return to natural, market-driven forces is not going to go without a hitch or two." Exporters were hit hard. Advantest, which tests semiconductors and has a strong presence throughout Asia and in North America, dropped 6.1% and China-exposed air-conditioner maker Daikin Industries dropped 3.7%. Adding to the downward pressure on exporter shares was a sharp fall in the dollar against the yen. While the greenback fell as low as Y101.77 in early morning trade, its lowest level since Dec. 6, it later recovered some of its losses and as of the close of trading on the Tokyo Stock Exchange, was trading at Y102.45 after falling earlier through Y102. A weaker dollar makes it hard for Japanese exporters to sell their goods more cheaply overseas, harming their competitiveness. Few players are willing to try to catch a 'falling knife,' according to one equity-trading director at a foreign brokerage. "With so many risks ahead this weak, nobody wants to aggressively buy stocks," he said. One of those risks the Jan. 28-29 Fed meeting. Another is Japan's corporate earnings reporting season, which is set to hit high gear later this week. The U.S. central bank is likely to provide some clue as to how it plans to reduce its bond buying operation going forward, says Daiwa strategist Kazuhiro Miyake. Its decision could, in turn, have a profound effect on how investors channel funds into high-growth markets such as China and elsewhere. "In any case the Fed can be expected to exit the third round of its quantitative easing around end-2014," he says, while the Bank of Japan will likely continue aggressive easing this year and next to achieve its 2% inflation target.

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