Yamaichi, and the rest of Japan's once-mighty financial industry, face a deepening crisis triggered by rising borrowing costs, plunging stock prices and pressure to speed up the disposal of trillions of yen in bad loans.
The stockbrokers lost pounds 40m in the first half, while a scandal over illegal pay-offs to a gangster and concerns that it may have hidden financial problems sent the stock plummeting on Friday.
While big institutions - particularly foreign fund managers - were selling, what most worried analysts was the selling by local banks and other institutional investors linked with Yamaichi through Japan's system of cross-shareholdings. In that system, companies hold each other's stocks to keep them out of unfriendly hands - unless there appears to be a very strong reason to sell them.
And there are strong reasons to sell Yamaichi, analysts say, despite the company's denial it has cash-flow problems. Prosecutors allege it paid gangster Ryuichi Koike pounds 800,000 to stop him making a stink at the company's annual shareholders' meetings. Eleven top executives, including the president and the chairman, resigned in August. The stock has dropped by two-thirds, from 280 yen to below 100 yen, since then. It will probably be barred from certain types of business, such as trading stock on its own account, for several months.
On top of that, Yamaichi faces all the same problems as the rest of Japan's brokers: a more competitive market by 2000, when Japan says it will let banks compete with stockbrokers; and a moribund market since the collapse of the speculative Bubble Economy seven years ago.
"The turmoil in brokerage shares reflects an anxiety about the health of the financial system," said Shigeharu Shiraishi, director at Yamaichi International Capital Management. "This is triggering an all-round rout."
The Nikkei index has fallen to its lowest level since July 1995 and the brokers' troubles have spilled out to hurt the market.
Sanyo Securities, a medium-sized brokerage, filed for bankruptcy just last week, the first publicly traded Japanese brokerage to do so. As the government prepares for deregulation, it is likely to let more brokerages go under. Before, it might have tried to keep them afloat to protect the stock market.
The government has done nothing to staunch the damage so far, although a senior finance ministry official last week acknowledged that the so- called "Japan Premium" - the higher interest foreign banks charge Japanese lenders to borrow dollars - has tripled in recent weeks. That's made it costly for Bank of Tokyo Mitsubishi, Sumitomo Trust & Banking and Japan's other big nationwide and regional lenders to raise funds.
Those borrowing costs may rise even more after two credit-rating services, Standard & Poor's and IBCA, announced on Friday they were cutting the ratings of most of Japan's lenders because of bad-loan problems.
A slumping economy has led both companies and consumers to cut back on spending. Bank lending has fallen in 42 of the last 44 months.
The heart of the banks' problems is their estimated pounds 70bn in bad loans. Most of the debt stems from the excesses of the 1980s, when banks rose to become the world's largest lenders.
That bad debt is likely to swell. Bankruptcies are soaring to record levels at home, and Asia's turmoil is heightening the risk of defaults on the continent, where Japanese banks have $265bn (pounds 185bn) in outstanding loans. "Japanese banks are in a tight spot," said Koyo Ozeki, director of IBCA in Tokyo.
While the banks have been trying to dispose of their bad loans for years, the finance ministry is stepping up the pressure. By 1 April, banks will have written off all loans to borrowers who are unlikely to be able to repay. Failure to stick to the rules could bring trouble from auditors and jeopardise a bank's credit rating.
That prompted Bank of Tokyo-Mitsubishi to announce it would write off 1 trillion yen in bad loans, taking a loss this year. In a bid to replace capital drained by bad-loan write-offs, banks like Sakura Bank and Tokai Bank have sold new stock. Yet with the stock market sliding, banks cannot afford to depress prices much more by increasing the number of outstanding shares, and are now having to slash assets.
One way to do this is by repackaging loans and selling them off as securities, a path chosen by Fuji Bank, the most aggressive asset-trimmer among the big commercial banks.
Banks with low levels of capital adequacy stand a greater risk of being socked with a weak credit rating, making them more liable to be charged higher interest rates when they try to raise money abroad.
Sales of cross-held shares are starting to rise, threatening a further fall in the stock market. This year, Long-Term Credit Bank of Japan could sell as much as 350 billion yen in cross-held shares, said Makiko Aizawa, a bank analyst at Salomon Brothers Asia.
"The sale of cross-held shares could still be a blessing, making lenders leaner and more profitable," said Elizabeth Daniels, director at Morgan Stanley Japan. "Since the market is down, [banks] have got to make some tougher choices. That is possibly a good thing."
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