London operations could suffer as plunging Nikkei threatens Japanese institutions

Japan's deepening financial crisis looks set to spread to London as Yamaichi, the country's fourth largest securities house, prepares to close its overseas operations, with the loss of 2,500 jobs. John Willcock reports on fears that a triple weakening of Japanese stocks, bonds and currency this week could trigger a crisis in its overstretched banking system.

Yamaichi Securities will cut its staff by a third in just over two years, gradually withdraw from its overseas operations and set up two subsidiaries under a holding company by April, the firm said yesterday, casting doubt over the future of its London operation.

No one in Yamaichi's London office was available for comment yesterday. It is unclear what, if anything, will happen to the London operations.

In Tokyo Yamaichi said that by April 2000 it will slash staff to 5,000 from 7,500. As the Nikkei fell last week, Yamaichi's share price dropped by nearly a fifth last Friday alone, and traded briefly below Y100, two- and-a-half times less than its share price a month ago and a fraction of its Y3,000 share price in the late 1980s.

This spurred rumours of a non-Japanese rescue bid for Yamaichi. Such rumours would previously have been laughed at by Japanese financiers but are now taken more seriously, as Japan's Ministry of Finance appears unwilling to launch a rescue operation itself.

The Nikkei 225 stock index plunged to its lowest since July 1995 on Friday, closing 344 points down at 15,082, on disappointment over economic stimulus measures from the ruling Liberal Democratic Party. At one point the index fell below the psychologically important 15,000 level.

The most serious immediate problem is that Japanese banks hold much of their capital reserves in the form of equity investments, the value of which have fallen rapidly in recent months. Further falls in the stock market will make them technically insolvent.

Japanese investors are bracing themselves for another tough week. "Concern over a triple-weakening [of stocks, bonds and the yen] is very strong," said Soichi Okuda, senior economist at Nippon Credit Bank in Tokyo, yesterday.

Larry Summers, US deputy Treasury Secretary, flew from Washington to Tokyo yesterday for talks today with Japanese finance ministers in an effort to head off the growing crisis. Japanese banks hold huge amounts of US government bonds, and if they start selling those off to repair their battered balance sheets, America's own finances would be badly hit.

Some observers think the Americans may be willing to help construct a "lifeboat" for the worst-hit Japanese banks, which would take over the $900bn bad debts weighing down the commercial banking system.

For instance, eight leading Japanese banks are believed now to be below the minimum capital adequacy requirements of the Bank for International Settlements (BIS).

On Friday IBCA, the credit rating agency, issued a note titled: "Thinking the unthinkable. A Japanese banking crisis? The need for a contingency plan." IBCA criticised the Japanese authorities for hoping for better times rather than planning for the worst. "In one way or another the Japanese banks have managed to lose almost $700bn in eight years, a not entirely inconsequential sum."

IBCA added that if the Nikkei drops to 12,000, some trust banks would see their whole equity disappear.

In an attempt to make amends, the Japanese government will next Tuesday release its own package to revive the economy. Observers do not expect major surprises since it will be based on the Liberal Democratic Party's proposals.

The LDP's second stimulus package, following an initial plan last month, offered no income tax cut to boost consumer spending, nor any significant public works spending measures. The package included measures to improve the nation's infrastructure and telecommunications network and assist small companies.

"It's very questionable how much effect the proposals will have on economic growth," said Takeshi Naito, assistant general manager in the bond department at Daiwa Securities.