THE BARINGS CRISIS : Japan's nightmare deepens

The crisis at Barings could not have hit Tokyo at a more nervously volatile moment. Just as investors were sobering up to the full economic cost of the earthquake in January, the dam burst this month on a gargantuan financial scandal.

It simultaneously drenched much of the Japanese establishment with its sordid revelations while exposing the fragile foundations of the domestic banking system.

However, this is not the only reason the now infamous Nikkei Average of 225 issues on the Tokyo Stock Exchange plunged by 3 per cent last week. The Nikkei opened today 140.27 points lower at 17,332.67 and had been forecast to move yet lower this week even without the Barings collapse. "Technical" pains are also aggravating incipient ulcers among bankers and brokers. Japanese investors like to sell part of their stockholdings just before the end-March closing of books to window-dress their balance sheets with extra profit.

This year there is a far greater source of anxiety. The record balance from arbitrage buying - long positions - of more than 1.5 billion stocks is casting a shadow over the TSE. Japanese brokerages are already under pressure to unwind some of these positions to show a paper profit before 31 March. If the price of futures on the main TSE index falls below the cash index, this unwinding could turn into a stampede.

Since Barings' troubles have been brought about by one of its Singapore traders playing out of control with Nikkei futures, this could easily happen, unless the Japanese Ministry of Finance succeeds in enforcing discipline and restraint through its barrage of orders to the Japanese brokerages this morning.

A quick recovery, though not in sight, would leave the gnawing cancer of the loan scandal. The demise and rescue of the Tokyo Kyowa and Anzen credit unions - with almost one billion pounds of public money - and dragooned private banks has already besmirched the once untouchable Bank of Japan and the Finance Ministry.

What has been causing sleepless nights among Tokyo market players is a run on Japanese banks and other credit unions, burdened by hundreds of billions of pounds in bad debts from the blow-out of Japan's asset bubble in the 1980s, if public anger and a political revolt prevent the rescue. Which is why Finance Minister Masayoshi Takemura, spent yesterday trying to win the support of the Tokyo governor for the bail-out.