HOWZAT

The speculation came as Asian markets began the week with a sudden, panicky plunge: Tokyo dealing floors ended the day in a maelstrom of sell orders that left the benchmark Nikkei 225 Index 6 per cent lower and at a closing low not touched since 1982.

“If ever there were a sign that nobody knows where to trade, this session was it” said one Daiwa Securities broker in Tokyo. “We are seeing the effect of massive hedge fund redemptions, some margin calls, and some fairly vague expectations about what the Japanese Government is going to do about stimulating the markets.”

The severe collapse in market confidence prompted Taro Aso, Japan’s Prime Minister, to call on his cabinet to draft emergency measures to quell the panic. Despite the Japanese Government’s well-earned reputation for slow decision-making, proposals to suspend short-selling and for the state to begin buying stocks held by the banks could be implemented by the end of today.

“Trading floors were prepared to give the Government the benefit of the doubt on this, but nothing is stopping the Nikkei falling at the moment,” said one Mizuho broker. “The Japanese stock market is being used as the Western world’s ATM at the moment because funds can sell out and get their hands on money fast here”, he added.

The Tokyo selling came amid a flurry of unsettling news from Japan’s banking sector, which is starting to look more vulnerable than previously thought and whose largest names – Tokyo Mitsubishi, Mizuho and Sumitomo Mitsui - have begun to look at emergency capital-raising measures.

Japan’s financial industry holds vast portfolios of stock, and has suffered heavy paper losses over the past eight weeks as shares have spent complete sessions in freefall. Some analysts, including Kristine Li of KBC Securities and David Marshall of Fitch Ratings Service have given warning that sharp market declines could soon threaten the capital adequacy ratios of many Japan’s banks.

Monday’s acute closing sell-off, which followed a session of extreme swings in the Nikkei Index, came as the yen continued its remorseless surge against the US dollar – an effect which currency brokers at Tokyo Mitsubishi UFJ blamed on the unwinding of yen carry trades that have financed so much commodity and stock speculation by now collapsing hedge funds.

Japan’s fast-developing currency crisis – one of Asia’s most dramatic ripple effects from the global credit meltdown – came amid a frenzy of regional market volatility in stocks, bonds and foreign exchange. Hong Kong shares fell more than 10 per cent and Singapore shares were also hit hard in the flight. Facing its own domestic version of the credit crisis and the possible collapse of its heavily leveraged household sector, the notoriously hawkish Bank of Korea slashed interest rates by 0.75 per cent in its biggest one-day cut on record.

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