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Japan markets two days plunge { January 19 2006 }

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January 19, 2006
After Panic, Tokyo Market Rebounds

TOKYO, Thursday, Jan. 19 - After two days in a row of plunging prices, the Japanese stock market rebounded early Thursday. Buyers returned and scooped up stocks they saw as undervalued.

By late afternoon the benchmark Nikkei index of 225 stocks was up about 350 points, or about 2.3 percent, a turnaround from the past two days when it chopped off about 6 percent of its value.

Trading Thursday was extraordinarily heavy and was close to being suspended by late in the afternoon in order to avoid overloading its computers. On Wednesday the market had to close 20 minutes early for that reason.

The turmoil began when the high-flying Internet company Livedoor was investigated on suspicion of securities fraud. The company fared well under its flamboyant founder Takafumi Horie until this week when it failed to trade for two days and kindled a near panic in Japan as investors withdrew billions of dollars from the Tokyo stock market.

In an attempt to calm the frightened investors, a parade of government officials, including Prime Minister Junichiro Koizumi, offered reassurances that economic fundamentals were in order. The chief government secretary, Shinzo Abe said, "It is desirable that stock prices firmly reflect economic fundamentals and move in a stable manner."

The tactic appeared to work on Thursday. With the market rebounding, buyers came in, seeking to scoop up stocks they saw as undervalued. The benchmark Nikkei index of 225 stocks was up about 350 points, or about 2.3 percent, by late afternoon.

The frantic quality of the last several days took on a grim aspect when an executive of a securities firm suspected of involvement in corporate takeover deals by Livedoor was found dead on the southern island of Okinawa, apparently having committed suicide, the police, quoted by the Kyodo news agency, said.

The executive was identified as Hideaki Noguchi, 38, a vice president of HS Securities, one of the companies raided by prosecutors this week in connection with the investigation.

Analysts watched the market closely Thursday, afraid that the earlier tumult could return and threaten the Nikkei, which soared more than 40 percent last year, and perhaps undercut the nation's fragile economic recovery after years of stagnation.

In a blow to the nation's pride, the Tokyo Stock Exchange closed early on Wednesday because an old computer system failed to keep up with the rush of trading orders. The exchange operated on a shortened schedule on Thursday, and was nearing the trading limit - four million transactions - that would trigger an early close.

On Wednesday, markets around the world fell, ending down 1.2 percent in Frankfurt and 0.6 percent in London. In New York, the Standard & Poor's 500-stock index market slipped 0.39 percent.

The development that set off "Livedoor shock," as the Japanese news and entertainment media call it, occurred on Tuesday, after prosecutors marched into the home and the office of Mr. Horie, who has endeared himself to admirers with a boyish pudgy face and spiked hair, but has enraged Japan's financial establishment with his aggressive tactics. The raid was carried live on the evening news.

Senior Japanese officials sought to minimize any potential impact on the recovering economy, as well as embarrassment to a country trying to regain leadership in critical fields of advanced technology.

James Fiorillo, an American who advises the Japan Natural Selection Fund, one of many foreign funds that heavily expanded its investments in this country last year, commented: "This thing has taken on greed, panic and fear. Banks and trading companies are getting hammered, and their businesses are doing well in this economy."

In the meantime, Japanese regulators widened their investigation into Mr. Horie and Livedoor. The company is reportedly being investigated for violating Japan's security laws by spreading false information. According to Japanese newspaper reports Thursday, prosecutors are also investigating whether Livedoor's parent company falsified figures for financial statements in 2004 to make an $8.7 million loss look like a $12.2 million gain.

Livedoor issued a statement just before trading started on Thursday morning, saying its own investigation had found no problems in two areas thought to be under investigation, an affiliate's takeover of a publisher and its stock split.

In the last two years, Mr. Horie has made headline news with a success story that has turned him into the Bill Gates of Japan. He seemed to revel in tweaking the country's clannish business elite, whom he once dismissed as a "club of old men."

He especially raised hackles by attempting a hostile takeover of a radio network and by trying to buy a baseball team. Hostile takeovers are rare in Japan. Though the radio network, the object of a bid last spring, was small, it was an affiliate of the Fuji Television Network, the country's largest private broadcaster. Both attempts failed. But they did not seem to dent his ability to make money from his conglomerate comprising a popular Internet portal and about 40 related ventures.

Mr. Horie has built Livedoor into one of Japan's most heavily trafficked sites, offering everything from free e-mail, travel reservations, consumer financing, lists of used cars for sale and even a blog he wrote. In five years, Livedoor's stock value soared 150 times, to $6.34 billion at the beginning of the week.

Livedoor shares did not trade on Wednesday or Thursday. Still it shares were marked down Wednesday by the daily 100-yen limit, to 496 yen. At that price, more than $1.8 billion of the company's market value was wiped out.

"We need more updated information and better disclosure," Taizo Nishimuro, president of the Tokyo Stock Exchange, said of Livedoor.

On Wednesday, Mr. Nishimuro raised the possibility of delisting Livedoor.

Mr. Horie's casual style and bold business practices have alienated many old hands in this country. The Nihon Keizai Shimbun, the business daily, said this week, "Since listing his company in 2000, Horie has been accruing a reputation as an eccentric, aloha-shirted president who dodges questions from analysts."

By some accounts a geek version of Donald Trump, Mr. Horie wrote an ode to greed, titled, "Earning Money Is Everything: From Zero to 10 Billion Yen, My Way."

While he ruffled some, he enchanted many small investors, who accounted for half the trades on the Tokyo Stock Exchange last year. That enchantment snapped on Wednesday. Investors put in a vast number of trade orders stretching Tokyo's computer-based market. Part of that high volume was a result of Internet trading, a popular pursuit enabled by one of Mr. Horie's companies.

Compounding investor anxiety, exchange officials announced in advance on Wednesday that the order volume was expected to reach the system's capacity of 4.5 million trades a day, forcing an early close. After normally instantaneous trades started to take five minutes and more, exchange officials closed the market 20 minutes before the normal 3 p.m. closing time.

"The recent spike in orders is extraordinary," Mr. Nishimuro said. As long as these extremely high volumes last, he said, Tokyo's trading day will be cut by 30 minutes.

Last week, the exchange increased the market's order capacity by 20 percent, to nine million orders a day. On Jan. 30, trading capacity is to increase by 11 percent, to five million trades a day. On Wednesday, when the market closed 20 minutes early, the exchange had recorded 4.38 million trades and 7.3 million orders.

Belying Japan's high-tech, clockwork image, the exchange lost almost an entire day of trading in November because of a computer breakdown. In December, computers stymied a brokerage firm's attempt to reverse a botched trade, an error that led to $350 million in losses and brought down the president of the exchange, Takuo Tsurushima, who resigned to take responsibility.

To settle investors before Thursday's trading began, government officials made comments timed for the Wednesday evening television news. "I think it's of a temporary nature as economic conditions are solid over all," Prime Minister Koizumi said.

Kaoru Yosano, the financial services minister, reassured investors at a news conference: "We do not fear a chain reaction."

Hours earlier, the alarm over Livedoor had spread to other Internet stocks. Yahoo Japan fell by almost 10 percent. Softbank fell by 13 percent, both near their maximum allowable price movement.

"Our fund managers think that the next couple of days will be choppy," Alexander M. Prout, president of Invesco in Japan, said after trading ended Wednesday. Mr. Prout, who said he managed $5.3 billion in Japanese equities, blamed "media hysteria" for the turmoil.

"Anytime there is a quick run-up in the marketplace, there is that breathing pause," he said, referring to the Tokyo market's recent surge. "But because there is nothing fundamentally wrong, when the lull settles you will see buying opportunities."

Wall Street traders said Wednesday that there was little noticeable concern in New York over the shutdown of the Japanese market, which came on top of a sell-off over disappointing results from American technology companies. They noted that the Tokyo exchange has a limited capacity to handle orders and that Livedoor has a large number of small individual investors and many of them were trying to sell shares. Some traders saw the two-day drop in Tokyo as a buying opportunity.

But many feared that they might be hearing the popping of a miniature Internet bubble.

"If Livedoor did not disclose correct data for their financial statement, that is big, sort of a similar situation to Enron," Nobuo Sayama, a business professor at Hitotsubashi University, said after the market closed Wednesday.

Referring to the Internet companies that have clustered in a new Tokyo hotel and office tower, he predicted: "This event is a start of big problem that will expand to other Roppongi Hills companies. They will be attacked later on."

But Mr. Sayama, like the Americans interviewed, said he believed that Japan's economic fundamentals were sound.

Some analysts said Tuesday and Wednesday would eventually be seen as a speed bump on the way to the Nikkei breaking 20,000, a level substantially below its high of 38,915 in December 1989.

G. Thomas Sims, in Hong Kong; Martin Fackler in Seoul, South Korea; and Jenny Anderson in New York contributed reporting for this article.

Copyright 2006 The New York Times Company

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