Banking misery engulfs Japan

From Times Online
October 28, 2008

Until recently Japanese banks had largely avoided agonies of the credit crunch. Now the misery has come to Tokyo
Leo Lewis, Asia Business Correspondent

The Japanese banking sector, once considered a safe port in the global deleveraging typhoon, has begun to crumble in the face of stock market crashes and the destructive unwinding of the yen carry trade.

The extent of the crisis emerged this week when the Nikkei 225 Index of Tokyo shares plunged to its lowest level since 1982, briefly breaking the 7,000-point level in a dip that analysts believe with have dire consequences.

The dip triggered a political panic in Tokyo, prompting the authorities to introduce a series of emergency measures aimed at shoring-up the stock market before the carnage unleashes a domino collapse of the nation’s weaker banks.

The plunge in Tokyo shares has been wildly amplified by the worldwide demise of the yen-carry trade – the gambit of borrowing yen cheaply to finance asset buying across the globe. The trade was a favourite of precisely the kind of hedge funds and speculators now hastily stampeding out of risk for the supposed safety of cash.

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Nomura Holdings, the Japanese securities house which snapped-up the Asian and European operations of Lehman Brothers in its bid to become a global investment banking giant, unveiled huge quarterly losses of Y72.9 billion (£480 million). Several of the country’s largest banks, including Mitsubishi Tokyo UFJ (MUFG) and Norinchukin are now scrambling to raise billions of dollars of capital and red flags have been raised over the survivability of Japan’s regional banks.

The flood of red ink on Nomura’s results, which does not even include the $2 billion it forked-out for Lehman Brothers, highlights the catastrophic damage caused to the Japanese financial industry by the steep decline of stock values. Despite a rally in the index, along with a substantial dip in the yen, the landslide autumn sell-off has brutalised the share portfolios of the Japanese banks and now threatens their capital adequacy ratios.

MUFG unveiled what brokers described as “desperate looking