News of the crisis broke as South Korea, hit hard by the continuing turmoil in Far East markets, bit the bullet and appealed to the International Monetary Fund for an emergency loan to end its financial crisis. Cathy Newman in London and Richard Lloyd Parry in Tokyo report.
The Nikkei English News reported that Yamaichi planned to ask the Ministry of Finance to shut down its operations. The paper reported that heavy withdrawal of assets by Yamaichi clients had triggered the liquidation request, adding that the Bank of Japan would provide unsecured, unrestricted emergency funds to Yamaichi to guarantee the firm's clients would be fully repayed.
This would not be the first time the company has run into severe trouble. Yamaichi filed for bankruptcy protection in 1965, which resulted in a special infusion from the Bank of Japan.
The company's 3 trillion yen in debt was downgraded to junk by Moody's Investors Service yesterday. Moody's said that Yamaichi's "reduced funding availability - in combination with an already reduced capital base - raise questions about the firm's ability to achieve its strategic repositioning, regain lost market share and return to profitability."
The debt downgrade makes it harder and more expensive for Yamaichi to borrow, and hampers the company's chances of surviving as an independent concern, the Nikkei English News reported. Yamaichi has lost money in four of the past six years and has become caught up in a scandal over payments to a gangster that could bring it heavy punishment and more losses. Its former president was arrested in August.
David Sexton, vice chairman of Yamaichi's US activities, said officials in New York were trying to work out if the company was going bankrupt.
The Nikkei English News said Yamaichi had discussed possible capital infusions or alliances with several foreign financial institutions in recent days. But in the light of Japan's forthcoming Big Bang reforms, Yamaichi reportedly decided it would not be able to compete against overseas and bank-affiliated securities firms.
The reports revived expectations that investors would seek US Treasuries as a haven from economic turbulence in Asia. As a result, US bonds rose.
The Federal Reserve Bank of New York said it would not comment on the report. Officials at the US Securities and Exchange Commission also declined to respond. "Our policy is not to comment on specific companies," a spokeswoman said.
John Breazeale, who manages about $160m in assets for Weiss Money Management in Palm Beach Gardens, Florida, said last night: "It should serve as a warning flag of more problems in Asia."
Vince Verterano, head of government bond trading at Nomura Securities International, said the newspaper report "shows that financial problems still exist in Japan. It makes people nervous."
The Dow Jones erased a 54-point gain and moved lower in mid-afternoon trade immediately after the story broke. A sell-off of futures also followed the news, and the dollar rose sharply against the yen, before easing off again.
In Korea, the Seoul stock exchange surged by 3.6 per cent and the Korean won, which has lost more than 20 per cent of its value since the beginning of the year, strengthened from 1139 to 1065 against the dollar after a junior finance minister announced that the government had finally decided to seek financial support from the IMF. South Korea has requested $20bn (pounds 12bn) in the form of a stand-by credit.
Lim Chang Yuel, the newly appointed minister of finance and economy, said: "The IMF loan is not a bail-out loan. It's a stand-by credit. It is backing up the liquidity shortage. An IMF loan has the advantage of stabilising the market quickly."
After a meeting in Seoul with Stanley Fischer, deputy director of the IMF, Mr Lim said that the amount would be enough to resolve the "difficulties" in the foreign exchange market. But financial market analysts were sceptical, as the country's short-term foreign currency debt is thought to amount to around $70bn with perhaps $20bn-$30bn falling due before the end of this year.
South Korea's difficulties have become critical in the last few days, as the plunge in its currency, coming after an extended economic slowdown, has raised anxieties among international banks about the ability of Korean companies to pay their debts. Banks in Japan, which have already begun failing under the weight of bad loans, have become particularly reluctant to extend credit to Korea.
When similar currency crises hit Thailand and Indonesia over the summer, they received loans from the IMF, other international institutions and foreign governments, including Japan. The IMF has put up $3.9bn of a $17.2bn loans package for Thailand and $10bn of a $40bn package for Indonesia.
The loans will be drawn as needed by the authorities in each country to meet the credit needs of the domestic banking system. But assistance has been made conditional on tough economic austerity programmes and on restructuring the ailing banking system.
Although no details of the terms of the IMF "conditionality" in Korea's case have been released, it will be a more complicated deal because of the scale of the problem and the political sensitivities of the Koreans. As the world's eleventh biggest economy, Seoul's problems dwarf those of the South-east Asian countries where the currency contagion first incubated in the early summer.
It seems likely that the IMF will eventually be called upon to organise its biggest rescue package ever.Reuse content