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Global crisis hits Japan financial sector

The global economic crisis claimed its first Japanese financial institution and the Govt looked to prop up smaller banks, as Tokyo shares flirted with their biggest one-day fall since the 1987.

business Updated: Oct 10, 2008 11:36 IST

* Insurer first Japanese financial sector victim of crisis

* Government looks at reviving 1990s crisis bank rescue law

* Nikkei dives 11 pct before finding feet, down this week

The global economic crisis claimed its first Japanese financial institution on Friday and the government looked to prop up smaller banks, as Tokyo shares flirted with their biggest one-day fall since the 1987 market crash.

Escalating bankruptcies in the property sector and among small businesses, along with fears of a global recession, have dragged Japan's export-dependent economy into the crisis, sending blue chip shares sliding by a quarter so far this week.

"This is panic. New York, the currencies -- there's nothing left for us to trust," said Takashi Ushio, head of investment strategy at Marusan Securities, as the Nikkei share average slid more than 10 per cent, following sharp falls on Wall Steet.

"Investors are scurrying to convert to cash. A lack of confidence is coupling with panic."

As unlisted Yamato Life Insurance Co failed, the government said that to help hard-hit smaller lenders it may revive a bank rescue law from the 1990s Japanese banking crisis. One newspaper report suggested Tokyo may set up a $100 billion fund.

Fearful selling also sent Hong Kong and South Korean shares down 7 per cent while Singapore declared its first recession in six years as the US stock plunge heaped pressure on economic powers to halt a global spiral of financial distress and slowing growth.

Financial policy makers from the Group of Seven major industrial nations, including Japan, are to meet in Washington later on Friday to consider what to do next, as bank bailouts, liquidity injections and interest rate cuts across the world have failed to quell investor anxiety.

After arguing for months that Japan had avoided the worst of the global financial crisis, its leaders acknowledged they were increasingly worried about the stock falls.

"(Share prices) have fallen to the level where they can hurt firms' funding. So I have instructed the ruling coalition to come up with steps," Prime Minister Taro Aso told reporters.

The yen soared as investors fled riskier investments elsewhere, while Japanese government bonds were crunched as bond dealers sought cash.

"No one is buying. Fundamentals don't matter anymore and there's no explanation for such a plunge," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

Life Insurer Fails

Yamato Life, an unlisted insurer, failed with $2.7 billion in debt, although government ministers and analysts were quick to play down the risk of contagion.

"It is the smallest company in our nation's insurance sector," Economics Minister Kaoru Yosano told reporters. "The incident is a failure of a company that had a unique business model."

Yamato said it had actively pursued investments such as hedge funds and real estate investment trusts to boost returns.

"The news of Yamato Life was totally unexpected, sending shivers through the spine of many of us," said Hideki Amikura, deputy general manager of the forex section at Nomura Trust and Banking. "It will prompt fund managers to further trim risky assets. That is likely to boost the yen."

"On top of a tumble in US stocks, we have domestic credit fears on Friday. The news about Yamato Life came as rather a surprise and that is fuelling more fear," said Tsuyoshi Segawa, equity strategist at Shinko Securities.

Increasing problems for small businesses as Japan heads into recession and a particular squeeze in the property sector, after building regulations were tightened, have hurt banks with loans in these sectors.

With several property companies folding, some regional banks have been forced to raise reserves against bad loans and lower their earnings forecasts.

Finance Minister Shoichi Nakagawa, in Washington for the G7 and IMF meetings, said he had ordered Japan's financial regulator to investigate reviving a bank rescue law last used in the 1990s, when the bursting of a property and stocks bubble crippled Japan's banking sector.

Lawmakers from the ruling parties were also looking into the issue, Nakagawa said.

The Nikkei business daily said the resurrected law, which only expired in March, might be used to create a 10 trillion yen fund to help regional banks.

The ruling parties hoped to include this in a second economic package they aim to issue later this month, the paper said.

The government has already prepared an $18 billion stimulus package and Aso has called for another one.

The Nikkei share average tumbled 11 per cent before it found its feet, with a surging yen added to fears for Japan's big exporters.

Trading in key stock futures was briefly halted, as the Nikkei took its losses for this year to 46 per cent.

The euro sank to a three-year low against the safe-haven yen while the dollar hit a six-month low of 97.91 yen, as the panic gripping investors deepened on fears that the global financial system is faltering.

Even government bonds, which usually do well when investors flee risk, suffered a steep sell-off as bond dealers scrambled for cash after activity in a key repurchase market froze.

Trading in Japanese government bond futures was halted after the sell-off, which drove the benchmark 10-year yield up 11.5 basis points to 1.570 per cent.