"Stocks are reflecting concern about Japan," said Yousuke Miyake, bond manager at Nissay Asset Management.
The Nikkei index plunged below 16,000 for the first time in almost two and a half years last week, as a report that Bank of Yokohama will liquidate its entire equity portfolio triggered concern over a massive sell-off of bank shares.
In the week just ended, the yield on the benchmark government bond, maturing in September 2005, was unchanged at 1.620 per cent. On Friday, it hit a record-low 1.570 per cent.
Banks dropped on news that Sanyo Securities had become the first brokerage in Japan to file for protection from its creditors as press reports speculated how much creditors such as Bank of Tokyo-Mitsubishi might see in losses or contributions to support the mid-sized securities house as it struggles to reorganise.
"How can we know the true value of a Japanese bank share when we don't know what its role is in supporting its competitors and members of other parts of the financial industry," said Pelham Smithers, a strategist at ING Baring Securities (Japan).
Japanese banks are already hurrying to write off an estimated 28 trillion yen ($226bn) of bad loans.
The Topix index of bank shares dropped 9 per cent over the week to 44.28 yen - its lowest for more than a decade. That dragged down the Nikkei by 3.8 per cent to 15,836.36.
Instability in Asia continues to weigh heavy on Japanese banks. As Asian markets fall, investors worry about defaults on loans made by Japanese banks to overseas companies. South Korean stocks fell as the won weakened further against the dollar. On Friday, its Composite Index fell nearly 7 per cent, its biggest ever one-day decline. Japanese banks had $24.3bn in outstanding loans to South Korean companies as of December 1996, according to the Bank for International Settlements.
Hong Kong's Hang Seng index fell almost 5 per cent over the week, to end at 10,104.50. Japanese banks have $87bn in outstanding loans to companies in the territory, according to the BIS.
As banks scrounge for money to cover possible increases in bad debt, they may try to cash profits from sales of cross-held shares which companies hold in other companies as a sign of good faith. The shares are often held for decades.
On Friday, the Bank of Yokohama denied it was selling its entire stock portfolio but admitted it was steadily selling long-held shares in order to improve its asset quality.
"It's a very aggressive indication that the cross-shareholding system will break down, and foreigners have taken this as a reason to get out," said Martin Keeble, head of dealing at Schroders Japan Ltd. "If other banks do the same, it's going to create an enormous supply of stock on the market over the next few years."
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