Stock markets shaken as Yamaichi closure leads to collapse in confidence

In a bid to calm international markets, the Japanese authorities yesterday promised to bail out customers of the ruined brokerage, Yamaichi Securities, but doubts about the stability of the country's financial system overshadowed world stock markets, repo

Richard Lloyd Parry,Tom Stevenson
Sunday 23 October 2011 07:39

The Ministry of Finance ordered Yamaichi to suspend all but its most routine operations after the company announced early yesterday morning that it was voluntarily closing down.

The Japanese financial markets were closed for a public holiday yesterday, but elsewhere reactions were broadly negative. In London, shares fell sharply in early trade with the FTSE 100 index losing more than 100 points at one stage. The market recovered its poise later in the day, however, after Wall Street appeared to take the Asian turmoil in its stride.

The FTSE 100 closed 87.2 points down at 4898.6 after a day of very thin trading. By the end of trading in London, the Dow Jones index was only 50 points lower but it later moved lower as attention swung to how dealers would react in Tokyo when markets reopened after the long weekend.

Western stock markets focused on the impact the collapse in confidence in the Far East would have on earnings forecasts for companies with a heavy Asian exposure and the worst performers included banks such as Standard Chartered and HSBC. Merrill Lynch said yesterday it thought adverse currency effects, slower economic growth and lower product prices would have a "significant" effect and money poured into perceived safe havens such as utilities.

Others were more bullish, believing the thin volumes seen throughout yesterday's session suggested that the early falls in UK equities were triggered by a markdown rather than any panic selling. The optimistic view sees the Japanese monetary authorities moving to restore investor confidence and global markets staging a swift recovery.

Shares in South Korea, under the cloud of an IMF rescue mission likely to plunge the economy into recession, fell 7 per cent yesterday to an all-time low. Hong Kong's Hang Seng index ended slightly higher, up 72 points at 10,620.1.

Shohei Nozawa, Yamaichi's president, wept as he made the official announcement after a weekend of crisis meetings failed to come up with any way of saving the company, the fourth-biggest of the Japanese brokerages. "This unexpected situation on our 100th anniversary is heartbreaking, and we don't know how to beg the pardon of our customers, shareholders, and many related people who care for us," the tearful executive told reporters during a press conference at the Tokyo Stock Exchange. "As a representative of the company, I am deeply sorry."

The government's most senior finance officials moved quickly to promise protection to customers of Yamaichi and to bail out other financial institutions facing credit difficulties. Declining stock prices, together with a stagnant economy, have made it much more expensive for Japanese institutions to borrow money on the international markets. It was the decision by Moody's, the American credit rating agency, to downgrade Yamaichi's debt to junk bond status last Friday that effectively sealed the brokerage's fate.

"Every effort will be made to protect the assets of Yamaichi's clients," said the minister of finance, Hiroshi Mitsuzuka. "Therefore we strongly urge investors and business clients not to be concerned and to stay calm. Although Yamaichi's net worth is judged positive at this moment, we stand ready to take any appropriate measures to secure the return of clients' assets and to ensure the orderly settlement of existing transactions and positions."

In a separate press conference, the governor of the Bank of Japan (BoJ), Yasuo Matsushita, announced it would extend unlimited unsecured loans to Yamaichi to protect some 24 trillion yen in client deposits. He said the government would draft legislation intended to increase the size of bail-out funds for banks, insurance companies and brokerages in order to protect against future failures. And, in an attempt to assuage fears of further collapses of financial institutions, he declared the BoJ's readiness to take "necessary supportive steps to cope with the risk of unexpected decline in market liquidity".

The Tokyo Stock Exchange will register its reaction this morning when it reopens after a three-day holiday. When Japan's tenth-largest bank, Hokkaido Takushoku, went bust last week, the Nikkei share average rose on hopes that the failure would help the banking system to flush out the bad debts left over from the collapse of the bubble economy.

The collapse of Yamaichi is a traumatic event unlikely to be greeted so positively.Its collapse is the biggest corporate failure in Japan since the Second World War. Yamaichi employed 7,500 people at 117 domestic branches and more than 30 branches overseas.

The collapse has also exposed once again the seemingly endemic corruption in a financial sector which has promised again and again to clean up its act. Earlier this year, Yamaichi's image was sullied when, along with the other three of the "big four" brokerages, it was implicated in a scandal involving illegal payments to a corporate racketeer. Over the weekend it emerged that the company had been hiding more than 260 billion yen in losses in dummy companies in the Cayman Islands.

The existence of the debts, bigger even than the huge hidden losses racked up by Sumitomo Corporation and the banks, Daiwa and Barings, will complicate the BoJ's mission to bail out the brokerage. The use of public funds to rescue mismanaged companies is highly unpopular among Japanese voters.

The failure by the authorities to detect the losses undermines their credibility and raises the possibility that there are other financial institutions similarly burdened with secret debt. Some analysts detected an ambiguity in the government's promise to protect depositors. Despite promising to extend loans to Yamaichi, the government has yet to commit itself to detailed measures to bolster up the weaknesses in the financial system in general.

Outlook, page 23

Hamish McRae, page 26

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