The Nikkei average of 225 shares this morning rose 3 per cent in early trading following a drop yesterday of 854 points - more than 5 per cent - to a close of 15,867.53, after Yamaichi Securities, Japan's fourth- largest brokerage, was forced to close on Monday in post-war Japan's biggest corporate collapse.
In an alarming development, Yasuda Trust, the country's fourth-biggest trust bank, saw its debt downgraded by a leading credit agency to junk bond status, a decision which dealt the final blow to Yamaichi last week. As if that were not enough, Tokuyo City Bank, a small regional bank, announced early today it was going out of business. Though the scale of Tokuyo City Bank's collapse was small compared with the failure in the past month of three significant financial institutions, the news added to gloom about Japan's economy.
Banking analysts in Tokyo do not expect Yasuda to suffer the same fate as Yamaichi, although it will face intense difficulties in the short term. Yasuda is the fourth-largest of Japan's seven trust banks, and like many of its competitors it has been hard hit by the collapse in land prices which have rendered many of its borrowers unable to repay their loans. Yesterday it announced a pre-tax loss of 75.5 billion yen (pounds 356m) in the six months to September, compared to a 4bn profit the year before.
The credit rating agency Standard and Poor's (S&P) lowered its long-term ratings for Yasuda from BB-plus to BBB-minus with negative outlook, below investment grade. In the medium term, S&P said: "It will be difficult for Yasuda to overcome challenges such as its seriously impaired asset quality, rising stock market volatility, growing wariness among investors and a slumping domestic economy."
If, as expected, Moody's announces a similar downgrade tomorrow, Yasuda will find it almost impossible to borrow money on the international markets as long as the rating lasts. By the time Moody's announced an even more drastic downgrade of Yamaichi last Friday, the brokerage's lines of credit had dried up and it was forced to close itself down. The collapse of a bank such as Yasuda Trust would have a far more serious effect on international sentiment but, for several reasons, this is unlikely to happen.
For a start, it is a core member of the Fuyo Group, one of Japan's keiretsu - huge corporate groupings of banks, insurance companies, trading houses and manufacturers, linked by cross-shareholdings and close personal relationships between executives. Within hours of the S&P announcement yesterday, Yasuda Trust made an allocation of 50bn of new shares to Fuyo Group members, including Fuji Bank, which is expected to tide it over in the short term.
No bank in a large keiretsu has ever been allowed to go bust and both corporate allies and the Japanese authorities are likely to view such a failure as a step too far, certainly in the current atmosphere. Unlike Yamaichi, which was tainted by scandals involving corporate racketeers and the illegal concealment of losses, Yasuda enjoys a sound reputation.
There were scuffles at Yamaichi branches yesterday as customers queued in the rain to close their accounts and collect their securities, and the Bank of Japan provided 800 billion yen in unsecured interest-free loans to ensure liquidity, according to Japanese press reports.
The finance minister, Hiroshi Mitsuzuka, repeated his assurances that the government would take "all necessary measures to ensure stability in the financial system", but shares were still sold heavily and seven out of the 10 biggest losers were banks.
The government's efforts to reassure the markets that they will not allow chaos to descend were reckoned, however, by some analysts to have limited the damage.
"It could have been worse," said Brian Waterhouse of James Capel in Tokyo. "The sense I get now is that politicians and bureaucrats are now moving in the same direction, and that the worst is already over.''
The yen closed yesterday at 128 to the dollar, its weakest for five years, exacerbating concerns that cheaper exports would increase Japan's trade surplus with its overseas partners.