Global Crisis Claims Japan Life Insurer, Markets Panic

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The global credit crisis claimed its first Japanese financial institution on Friday and the government looked to prop up smaller banks, as Tokyo shares suffered their biggest rout since a 1987 crash.

Government ministers played down the risk of contagion from the collapse of an unlisted, small insurer in Japan, which has been a safe haven in a global crisis that has destroyed banks across the United States and Europe.

But spooked investors stampeded for cash before a long weekend, freezing one of the last functioning money markets in the industrialized world and pummeling stocks. The Nikkei share average tumbled 9.6 percent, taking its losses for the week to 24 percent, following a dizzying slide on Wall Street.

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

Japan’s largest banks are still solid and expanding overseas, but sliding demand in Japan’s Western export markets is dragging the economy towards a recession, with bankruptcies escalating in the property sector and among small businesses.

Then Yamato Life Insurance Co failed on Friday and the government said it may revive a bank rescue law from the 1990s banking crisis to help smaller lenders. One newspaper reported Tokyo may set up a $100 billion fund.

Panic spread like wild fire across Asian markets on Friday. Hong Kong shares sank 7 percent while Singapore declared its first recession in six years and pressure grew on the Group of Seven rich nations to halt a global spiral of financial distress and slowing growth.

Financial policy makers from the G7, including Japan, will meet in Washington on Friday to consider what to do next, as bank bailouts, interest rate cuts and cash injections have failed to reassure investors.

Japanese Prime Minister Taro Aso added that Japan would also be ready to host a financial crisis summit of Group of Eight leading nations’ leaders if necessary following the Washington meeting.

CRISIS HITS JAPAN
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.

The Bank of Japan tried to unclog the pipes of the banking system by injecting 4.5 trillion yen ($45.5 billion) ahead of a holiday in Japan that had investors worried what might happen on their three days off.

It was the biggest one-day injection since the BOJ stopped flooding banks with cash in 2006 to end a decade of deflation.

“This has become a bit of a jinx, especially since on the last Japanese three-day weekend in September Lehman Brothers failed,” said Masayoshi Okamoto, head of dealing at Jujiya Securities.

Yamato Life, an unlisted insurer, failed with $2.7 billion in debt, although government ministers and analysts were quick to play down the risk to others in the sector. “The incident is a failure of a company that had a unique business model,” said Economics Minister Kaoru Yosano.

Yamato said it had invested in hedge funds and real estate investment trusts to boost returns, in stark contrast with the conservative strategies most Japanese financial institutions have followed since a 1990s asset price crash.

But the failure still shocked markets. “The news of Yamato Life was totally unexpected, sending shivers down the spine of many of us,” said Hideki Amikura, deputy general manager of forex at Nomura Trust and Banking.

SMALLER BANKS SQUEEZED
Increasing problems for small businesses as Japan heads into recession and a squeeze for property developers, due to tighter building regulations, have hurt banks lending to those sectors.

With several property companies folding, some regional banks have been forced to raise reserves against bad loans and cut their profit 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 from Japan’s 1990s banking crisis, when government bailouts totaled 47 trillion yen ($475 billion).

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 smaller banks — 10 of which issued earnings warnings on Friday.

The government has already prepared one $18 billion economic stimulus package and is working on another one.

The Nikkei tumbled 11.4 percent at one point before it found its feet, with a surging yen adding to fears for Japan’s big exporters.

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

“No one is buying. Fundamentals don’t matter any more and there’s no explanation for such a plunge,” said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

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 briefly after the sell-off, which drove the benchmark 10-year yield up 11.5 basis points to 1.570 percent.

($1=98.91 Yen)

(Additional reporting by Yoko Nishikawa, David Dolan, Taiga Uranaka, Aiko Hayashi, Rika Otsuka, Satomi Noguchi, and Tetsushi Kajimoto in Tokyo, Hideyuki Sano in Washington; Writing by Rodney Joyce; Editing by Hugh Lawson)