Investors are concerned that if stocks keep tumbling, there will be more government moves like last week's surprise tax cut.
"The effects of this Toshoku bankruptcy will definitely linger," said Martin Keeble, the head of dealing at Schroders Securities Japan. "We're down very aggressively this week, and I find it difficult to see how we're going to rebound aggressively into next week."
The Nikkei fell 5.2 per cent on Friday to 15,314.89, its biggest one- day fall in more than a month, and the first time it closed below 15,400 in five weeks. Last week the Nikkei fell 3.7 per cent. It will probably trade between 15,000 and 15,500 next week, according to Mikio Takada, manager at Nikko Securities.
The decline will also hurt the bond market. "If the Nikkei fails to keep 15,000 next week, concern will obviously emerge that investors will have to sell bonds," said Soichi Okuda, senior economist at Nippon Credit Bank.
In the week just ended, the yield on the benchmark No 182 government bond, maturing in September 2005, was unchanged at 1.635 per cent.
Toshoku said it had filed for court protection from its creditors, citing debts of 639.7bn yen (pounds 3.05bn). That's the third-largest bankruptcy in the nation's history, and follows the failures last month of two banks and two brokerages, including Yamaichi Securities, once Japan's fourth- largest broker.
Bankruptcies have risen every month this year, and the liabilities for closures in November were the second-highest total recorded at just over 2 trillion. "Banks, construction shares, anything perceived as financially unstable will be hurt by the Toshoku bankruptcy," said Mr Keeble. That means Toshoku's creditor banks, including Sakura Bank, Yasuda Trust and Long-Term Credit Bank of Japan, could extend their losses. Sakura Bank, Toshoku's main bank and second-largest shareholder, fell 15 per cent to 418. It was put on review for a possible downgrade by Moody's Investors Service after trading closed.
Yasuda Trust tumbled 11 per cent to 133 and Long-Term Credit Bank dropped 11 per cent to 210. The collapse shows that many banks' support for troubled companies could only be temporary. "Toshoku had a restructuring in August, and it's gone bankrupt, so even where a bank's pledged support, it doesn't necessarily mean it's going to continue," Mr Keeble said.
On Thursday the ministry of international trade and industry will release preliminary figures for industrial production in November. "The numbers will confirm what we already know - the economy's in lousy shape," said Mr Okuda.
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