Asian stocks fell heavily on Tuesday following last night's sharp decline in American shares. Investors responded to fears that the world's largest economy is sinking further into recession and speculation that the US Government may be forced to buy stakes in ailing banks, despite assurances from Washington that lenders would not be nationalised.

Japan's Nikkei Index fell by 1.5 per cent to a four-month low, narrowly avoiding a slide to below 7,000 for the first time in 26 years, closing at 7,268.56. In Hong Kong, the Hang Seng lost 461.46 points, or 3.5 per cent, to end the day at 12,713.64. Last night, the Dow Jones industrial average fell to an 11-year low, losing 250.89 points to 7,114.78.

Japanese shares remained in the red for the day despite hints from Kaoru Yosano, the newly appointed Finance Minister, that the Government may be working on more measures to support the domestic share market. "The side-effects of falling stock prices are worse than expected,” said Mr Yosano. “We are witnessing many negative wealth effects with impaired assets held by banks and insurance firms.”

Japan's Government is understood to be mulling over plans to buy falling stocks with money from the public purse in an effort to keep prices buoyant.

Japan’s biggest securities house, Nomura, announced that it planned to raise about $3.1 billion via equity issuance. The capital-boosting scheme – itself seen as a sign of deepening trouble in Japan’s financial sector – is expected to cause massive dilution for existing shareholders, a risk that sent Nomura’s shares down 8.4 per cent.

Concern is growing that the Japanese banks, despite their stable capital position relative to peers in the US, will rein-in their spending even more fiercely, triggering bankruptcies throughout the small and medium-sized industrial heartlands of Japan.

“The view out of the porthole has become rather watery,” said one Mitsubishi Tokyo UFJ broker describing the four-session run of selling in Japan.

The broader investment scene in Japan was no more cheerful. There have been ten bankruptcies among Tokyo-listed companies so far this year and the cost of insuring Japanese corporate debt against default has now near a record high.

On currency markets, the yen fell to a one-month low amid warnings by analysts that the recent strength of the Japanese currency was wildly out of kilter with the country’s economic strength and that the speculative use of the yen as a “safe haven” would now start to decline.

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