On the Tokyo Stock Exchange, the Nikkei 225 sank 3 per cent to its lowest level in 12-and-a-half years as more grim economic figures were unveiled about the world's second-largest economy. Industrial output fell 0.6 per cent in August from July, the sixth drop in seven months, whilesales at large retailers fell 5.1 per cent from a year ago.
Scores of Japan's biggest companies are slashing earnings forecasts while ratings agencies have been cutting the credit ratings of Japanese firms almost daily in the last few months.
Moody's Investors Service yesterday cut the core long-term debt rating of Japan's biggest brokerage, Nomura Securities, from A1 to A3 - a rare drop of two grades. Moody's said the move reflected substantial losses and asset quality problems in Nomura's international operations and severe earnings pressure in its domestic operations. Nomura's US and British units lost $350m on Russian government bonds at the end of August.
Analysts warned that the downgrade on Nomura, believed to be the only Japanese brokerage house that can survive heightened competition under Japan's "Big Bang" financial deregulation, highlighted more serious concerns about other brokerages.
The latest fall in the Nikkei also prompted warnings that banks and companies are sitting on massive unrealised stock losses. A change in accounting rules this year allows lenders to report securities at purchase price, rather than market value. The losses could surface if the rule is reversed, as expected.
Koyo Ozeki, an analyst at Merrill Lynch Japan, estimates that Japan's 19 major banks had about 6 trillion yen ($44bn) - almost one-third of their core capital at the end of March - in unrealised losses at current stock levels.
Standard & Poor's said it would review the ratings of 22 companies, among them top "AAA'' rated companies such as Toyota Motor, Japan's largest car-maker, and Nippon Telegraph & Telephone, the world's largest phone company. The downgrades are a further blow to Japanese corporations, which will see borrowing costs rise.
Economists are bracing for more bad news today when the Bank of Japan unveils its quarterly survey of business sentiment. The survey will be a "confirmation of a deepening and broadening recession, with increased fears of deflation and tightening of bank lending,'' said Cameron Umetsu at Warburg Dillon Read.
Even the quarter-point interest rate cut in the US on Tuesday is expected to do little to reverse Asia's slowdown, as bad debts in the region's banks make lenders reluctant to provide companies with more money.
Economists have also forecast that the government's continued attempts to bolster the economy with tax cuts and public works will be limited as long as demand from other parts of the economy are falling.