Japan feels full force of financial crisis

TOKYO (AFP) — Prime Minister Taro Aso warned Friday that Asia's largest economy was at risk as Tokyo stocks saw their steepest plunge in two decades and the crisis claimed the first Japanese financial institution.

The Tokyo market meltdown "has reached a point where it affects the real economy and fundraising," Aso told reporters.

The Nikkei stock index fell by as much as 11 percent before ending the day down 9.62 percent, the biggest loss since "Black Monday" in October 1987. The index has dived more than 24 percent over the past week.




The government was quick to try to reassure investors that the collapse of Yamato Life Insurance with debts of 2.7 billion dollars was an isolated case.

But the mid-sized insurer blamed the financial turmoil for its downfall as hopes faded that Japan would be relatively immune to the crisis that began in the US housing market and has spread around the world.

"Because of the global financial market chaos and the credit crunch, the value of our securities holdings rapidly fell. It was beyond our expectations," said its president, Takeo Nakazono.

It was the first Japanese life insurer to fail in seven years, and only the eighth since the end of World War II. The credit crunch has also caused numerous bankruptcies in Japan's crumbling real estate sector.

Later in the day, Aso ordered the Financial Services Agency to remove restrictions on share buybacks for the rest of the year as part of efforts to halt a plunge in stocks.

"The fall obviously went over the edge," Aso said.

Under the current regulations, Japanese companies cannot buy back their own shares freely as authorities believe that share buybacks could be used as market manipulation.

The financial turmoil threatens to pile further pressure on Japan's economy, which may have already entered a recession, analysts said.

"There's no doubt that the financial market turbulence is hurting the overall economy," said Taro Saito, senior economist at NLI Research Institute.

The stock market plunge was a reflection of investors' fears for the future of the economy, he added.

"It is even possible that Japan records negative growth this year," he said.

Japan's economy suffered its worst contraction in seven years in the second quarter of this year and many analysts believe it is already in recession, which is usually defined as two straight quarters of negative growth.

The Bank of Japan injected a total of 4.5 trillion yen (45.5 billion dollars) into money markets, the most since the crisis started, as ministers played down fears that other financial institutions might go under.

"The main reason for Yamato Life's situation is its unique scheme, under which the company used proceeds from high-yielding securities to cover losses from high-cost insurance operations," Finance Minister Shoichi Nakagawa said.

"Our understanding is that the situation is different from other insurance companies. It is extremely regrettable that the company's situation has come to this," he said in a statement.

Aso said he was ready to call an emergency summit of the leaders of the Group of Eight rich nations if finance ministers fail to come up with action to stem the crisis at a meeting later in the day in Washington.

Most Japanese financial institutions have escaped the worst of the global credit crisis, seizing the opportunity to expand overseas, buying stakes or assets from troubled Western banks.

Mitsubishi UFJ Financial Group Inc. is buying up to 24.9 percent of ailing US investment bank Morgan Stanley while top broker Nomura is buying a swathe of Lehman's operations across Asia, the Middle East and Europe.

Japanese financial institutions are believed to have been more cautious than many of their European peers in investing in risky subprime assets because they are still recovering from their own crisis of bad loans in the 1990s.