Tokyo's stock exchange was forced to pull the plug 20 minutes early yesterday after investors began dumping shares in Livedoor, the internet company under investigation for alleged market manipulation.
The inquiry into claims that Livedoor, under its brash young chief executive Takafumi Horie, falsified its earnings in 2004 sent Japan's benchmark Nikkei 225 index down 3 per cent, and unsettled investors in America and across Europe.
After its worst day in nine months on Tuesday, Japan's Nikkei average tumbled a further 464.77 points to 15,341.18. In America, the Dow Jones fell 41 points to close at 10.854.9. At home, the FTSE 100 fell 35.3 points to 5,663.7.
The shutters were pulled down on Japanese markets after frenetic trading saw almost 4.5 million shares change hands, the maximum allowed on any one day.
Taizo Nishimuro, the president of the Tokyo exchange, said the volume of trading had been "unexpected" and had forced the bourse to close at 2.40pm local time to restore calm. He said: "We will consider shortening stock trading hours, depending on the future situation."
Japan's Prime Minister, Junichiro Koizumi, later tried to reassure world markets that the problem was under control, saying: "I believe it is temporary because I think the general situation of the economy is solid."
Late on Monday, Japanese prosecutors and officials from the Securities and Exchange Surveillance Commission raided Livedoor's offices and the homes of three bosses, taking away papers and computers in their search for evidence.
Markets were spooked by the investigation into one of the brightest new stars of Japan's hi-tech economy. Already unnerved by lower-than-expected earnings at several major US tech companies, investors began selling Livedoor shares when a single broker refused to accept them as collateral, forcing others to follow suit.
The débâcle, which will again dent confidence in the world's second-biggest bourse, has raised fears that Japan's booming stock market may be overheating, even as the country enjoys its best economic figures in more than a decade. Paul J Scalise, an independent investment analyst, said: "There is some improvement in the fundamentals but nothing that would justify this sort of irrational exuberance. The stock market is up 80 per cent since the upturn in 2003. The figures don't justify that."
It has also raised concerns that the stunning stock market recovery is being artificially buoyed by internet-driven firms such as Livedoor. The company grew rapidly into a six-billion-dollar company through a series of takeovers and stock-swaps, a strategy one commentator on the state broadcaster NHK last night called "the reverse of healthy business practice".
Benjamin Fulford, a former Forbes Asia Bureau chief, said: "There are a lot of question marks about where Horie's money comes from. A lot of people are wondering, what exactly is his business?"
The collapse of Livedoor's share price also hit several other internet companies, including Japan's most successful hi-tech newcomer Softbank, which dropped 13 per cent.
Yesterday's closure is the latest in a string of débâcles to tarnish the Tokyo bourse's reputation. Analysts say the extraordinary volume of trade on the back of the recovering economy is overwhelming the exchange's computers. Ironically, the exchange had planned to increase its trading capacity to 5 million transactions by the end of this month.
Maverick entrepreneur divides country
Takafumi Horie's aggressive business tactics have inspired reverence and anger in equal measure among Japanese society.
In a country where success is generally built by increment, the brash young entrepreneur has built his internet empire by the pursuit of anything that will make him richer.
Last year, he quietly snapped up shares of Fuji Television, then launched a hostile bid. He eventually took a directorship of the company instead of full control, but the move prompted a shake-up of takeover law there. He failed to buy a Japanese baseball team in 2004, and has unveiled plans for a private space-flight business.
In a country where a shirt and tie is de rigueur among the business community, Mr Horie often appears in a T-shirt or without a tie.
He rarely loses an opportunity to kick out against Japan's conservative business establishment.
That caught the eye of another maverick, Japan's Prime Minister Junichiro Koizumi, who mobilised Mr Horie and an army of celebrity candidates in September to fight elections against MPs that had voted down critical postal privatisation plans.
Mr Horie, 33, was not returned, but the shares in Livedoor jumped each time he spoke on the campaign trail. He set up his internet portal - originally named Livin' on the Edge - in 1996 before dropping out of Tokyo University, in itself almost unheard of in Japan.
Livedoor divides the country like few other companies. For some, it is symbolic of the direction Japan must take if it is to rise from the ashes of the bubble economy, which mired it in a decade of bankruptcies, stagnation and bad debt. But many despise its roughhouse approach to businesses in a country where courtesy, modesty and personal connections still matter.
David McNeillReuse content