Japan acts to stem financial crisis with Yamaichi bail-out

Brokerage applies for closure amid suspicions of pounds 1bn concealed loss: In an effort to avert fresh panic on the international markets, the Japanese authorities were last night racing against the clock to thrash out a deal to bail out the customers of Yamai

It now seems certain that Yamaichi, one of Japan's "Big Four" brokerages, will apply today for voluntary closure, amid growing suspicions that the company illegally concealed almost pounds 1bn of losses in the Cayman Islands. The governor of the Bank of Japan, Yasuo Matsushita, will deliver a statement today promising unsecured loans of several billion dollars to protect Yamaichi's customers in a concerted attempt to restore international confidence in the country's financial sector before the Asian markets begin trading.

Global confidence in Japan's financial system has been drastically undermined since the bankruptcies earlier this month of Sanyo Securities and of Hokkaido Takushoku, the country's tenth-largest bank.

Although the Tokyo Stock Exchange is closed today for a public holiday, financial markets in Hong Kong, London and New York are braced for a rocky ride as the world waits to see how Japan plans to shore up its crisis- ridden banking sector. Analysts were last night forecasting heavy selling of the yen and equities and buying of US government bonds. In the unlikely event that the Japanese government fails to come up with a commitment to protect depositors, shares could be expected to plunge even more steeply on the foreign markets, thus adding to the likelihood of further bankruptcies.

Sliding stock prices are one of the factors putting pressure on Japan's banks, several more of which are believed to be near collapse under the weight of bad loans left over from the boom days of the 1980s "bubble economy" and the collapse of several Asian tiger economies in recent months.

Over the weekend, any hopes of saving Yamaichi evaporated as the American credit agency, Moody's, downgraded the brokerage to junk bond status, imposing an intolerable credit squeeze on the business and effectively depriving it of funding. The company is expected to leave some 3 trillion ($23.8bn) in debts, making it Japan's biggest business failure since the war. If the debts of other firms in the Yamaichi group are included, the liabilities could be as high as 6 trillion.

Over the weekend, an official of the Ministry of Finance said there were suspicions that Yamaichi had concealed more than 200bn in off-the-book debts, although other reports put the figure as high as 260bn. Kyodo news service quoted sources in the company as saying that these had been hidden in four or five dummy firms in the Cayman Islands.

They were apparently hidden from regulators by an illegal practice known in Japanese as tobashi, whereby brokerages temporarily transfer trading losses from one client to another so that none ever has to declare them on its books. Before the news of its imminent collapse, Yamaichi was being investigated for illegal payments to a corporate racketeer, a scandal which damaged its reputation and cost it several big customers.

The hidden debts are being investigated by Japan's Securities Exchange Surveillance Commission, but their disclosure once again raises questions about the stringency with which the Japanese authorities supervise their financial sector.

In 1995, the Ministry of Finance was embarrassed by the discovery of huge trading losses at Daiwa Bank which had gone undetected by inspectors for 11 years.

"As for what caused these off-balance sheet liabilities, that's something that will have to be cleared up by subsequent investigation," said Atsushi Nagano, the director-general of the Ministry of Finance securities bureau.

Even if Yamaichi is disposed of in an orderly way, the Japanese financial sector will remained extremely fragile, with more collapses inevitable as the country opens up its markets to foreign competition. Businessmen, investors and the US government have made it clear that they expect the government to stabilise the situation by using public money to help banks write off their bad debts. But the use of public money to bail out mismanaged companies is extremely unpopular with voters.

The demise of Yamaichi will affect 260 staff in its London-based securities arm, Yamaichi International Europe, but there are hopes that a buyer can be found for Yamaichi Bank UK.