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Last Updated: Wednesday, 18 January 2006, 11:49 GMT
Share panic mars Japan's recovery
By Robert Plummer
BBC News business reporter

The unprecedented turmoil that cut short Wednesday's trading on the Tokyo stock market is casting a shadow over Japan's tentative economic recovery.

A delivery man pushes a cart past a Tokyo brokerage, 18 January 2006
Euphoria has turned to gloom for Japanese investors

At the end of last year, the strength of the Nikkei share index was being hailed as proof that the country's economy had finally turned the corner.

During 2005, the index rose by more than 40%, its best annual performance for nearly two decades.

But now, after fraud allegations at internet firm Livedoor helped spark a rush to sell shares, there are fears that the optimism may have been misplaced.

One problem is that the Nikkei's boom had been fuelled in part by new investors, many of them foreigners and individuals trading over the internet.

In the words of Noriko Hama, professor of economics at Doshisha University Management School, that has saddled the Tokyo stock exchange with "a problem of its own making".

Computer problems

"The exchange - and also the financial regulators, to a certain extent - have been actively encouraging inexperienced private individual investors to come into the stock market, and look at the consequences," Ms Hama told BBC Radio 4's Today programme.

"They seem not to have been ready for something which they were actively promoting," she added, highlighting the way in which the exchange's computer systems nearly crashed under the huge volume of share selling.

"One fears that chaos will beget chaos as we go further down the road."

The suspension of share dealing has undoubtedly tarnished the image of Tokyo's stock market, already reeling from the impact of various problems that had highlighted the system's inadequacy.

In November last year, trading had to be suspended on the exchange for more than four hours after a computer glitch.

The following month, the Mizuho Securities brokerage lost $333m when a trader apparently hit the wrong button on his keyboard.

That scandal prompted the resignation of the exchange's president, Takuo Tsurushima, after it emerged that a computer fault meant the mistyped trade could not be cancelled in time.

Two more trading errors earlier this month have heightened the impression that the world's second-largest stock market is increasingly unable to cope with the scale of its success.


But is this just a little local difficulty or does it have wider implications for the health of the Japanese economy?

Last week, Japan's Finance Minister, Sadakazu Tanigaki, gave an upbeat assessment of the country's prospects, suggesting that it might finally shake off deflation in 2006 after years of falling prices.

But Ms Hama says the recovery could now hinge on whether Livedoor's troubles have undermined the credibility of the whole technology sector.

Pedestrians walk past Livedoor securities' office in Tokyo, 18 January 2006
Fraud allegations at Livedoor triggered the Nikkei's plunge

"I would suspect that there are other companies sailing pretty close to the wind. Maybe not so much as Livedoor, but all these new IT, hi-tech venture types of company have been doing things very differently from the way business has been done in the past in Japan," she told the BBC.

"This whole thing about IT ventures capturing people's imaginations was certainly one element in all the talk about Japan finally getting back on its feet again.

"If this aspect of the economy is seen to be dodgy, then the whole thing could start to unravel."

Other observers feel the impact of the Nikkei's plunge will be limited, and could even have a positive effect in teaching first-time investors the valuable lesson that share prices can go down as well as up.

But the episode has focused attention once again on the precarious state of Japan's economic health - just as the authorities in Tokyo had dared to hope that better times lay just ahead.

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