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Markets face rocky ride,Yamaichi crunch time looms
Reuters, Sunday, November 23, 1997 at 13:11
By Astrid Zweynert
LONDON, Nov 23 (Reuters) - Financial markets are braced for
a rocky ride on Monday as dealers assess the fallout from the
likely collapse of Japan's fourth largest brokerage, Yamaichi
Securities (TOKYO:8602), analysts said on Sunday.
The first judgment from international investors about the
latest bombshell troubling Japan's financial system will come
from Hong Kong, London and New York because Japanese markets are
closed for a holiday on Monday.
"The initial reaction is likely to be selling pressure on
the yen and equity markets and a firmer opening for U.S.
Treasuries," said Kirit Shah, chief market strategist at Sanwa
International.
The yen is likely to remain on the defensive as concern
about Japan's financial system deepened after Yamaichi
determined this weekend there was no chance of surviving a
credit crunch, shrinking business and high-profile scandals
involving corporate racketeers.
Yamaichi, Japan's oldest brokerage, said it was considering
all options, including ceasing operations.
Stock markets are likely to be hit amid fears of a domino
effect across Japan, Asia and possibly beyond, if Yamaichi is
allowed to collapse, analysts said.
"Dollar/yen will get a boost as the FX market is likely to
anticipate a fall in the Nikkei when Japanese markets open again
on Tuesday," said Mark Geddes, treasury economist at ABN AMRO.
Japanese government bond (JGB) futures traded in London were
also likely to be affected by the news when the markets open on
Monday, analysts said.
"Such a big bankruptcy would raise questions about the
health of some of the biggest buyers of JGBs," said Shah at
Sanwa.
Nikkei stock index futures on Singapore's SIMEX were
unlikely to trade on a Japanese holiday, traders said.
Yamaichi's trouble is the latest to hit Japanese banks
reeling from a stagnating domestic economy and turmoil in the
markets of Asia's "tiger" economies.
Over the past month, Sanyo Securities Co Ltd and the
10th-ranking Hokkaido Takushoku Bank Ltd were closed.
Analysts agreed that the extent of selling pressure on the
markets will depend on the response of the authorities to
Yamaichi's troubles.
"The Japanese authorities fear this will add to the
so-called 'sell-Japan' trades. Their response to Yamaichi's
troubles is key for the markets' reaction," said Joe
Prendergast, head of global currency strategy at Credit Suisse
First Boston.
With financial problems already troubling a string of Asian
countries, authorities are eager to ensure that Yamaichi's
problems do not cause a continent-wide cash crisis.
A special Bank of Japan board meeting will be held on Monday
on whether to extend special unsecured loans to Yamaichi, BOJ
sources told Reuters. They hoped the plan would be announced
before most of Asian financial markets open at 0100 GMT.
The Finance Ministry and the Bank of Japan contacted
overseas authorities to alleviate global concerns, especially in
the U.S. and European markets. The Bank of England said it was
watching events closely.
Jiji news agency reported Yamaichi's board would hold a
meeting at 2100 GMT on Sunday to formalise a possible windup
plan for the 100-year old brokerage.
The question is whether the government is prepared to use
public money to bail out Yamaichi.
If not, said senior bankers, Japan faced the risk that banks
would be contaminated by the fallout from Yamaichi. Trouble
could also spread to life insurers who have invested heavily in
loans to banks.
"It is a question of confidence....This is one of the
leading Japanese houses for fund raising...," said one senior
banker.
Battered Japanese asset markets and the ailing yen got a
boost earlier this week amid hopes that the government would use
public funds to solve the crisis in the banking sector.
Prendergast at CSFB said the latest Japanese financial
troubles reinforces the market trend of a stronger dollar/yen.
"It's a new twist in the story and supports the underlying
trend of a firmer dollar/yen," he said.
A business failure of such magnitude would add to the woes of
the yen, which is trading close to five-year lows against the
dollar. At 1655 GMT dollar/yen was at 126.00/10.
The yen is expected to weaken through the 130 yen level in
the medium-term as markets fret whether other major financial
failures will follow and how swiftly the government can reach a
consensus on the use of public funds to deal with the crisis.
Even though a sharp sell-off in the yen is likely to face
resistance from the Bank of Japan in the form of verbal - if not
actual - intervention, analysts said a further gradual weakening
is likely.
"Both the U.S. and Japan are more likely under such
circumstances to allow dollar/yen to rise than a few months
ago," said ABN AMRO's Geddes.
Until recently, the only prop for Japan's fragile economy
has been its ability to take advantage of the cheaper yen to
boost its exports.
But that support has been crumbling as the currencies of
other Asian nations tumbled.
Now that the crisis has spread to South Korea, a key
destination for Japanese exports, the prospects for the Japanese
economy have become grimmer still.
South Korea announced on Sunday that it would ask for $20
billion in stand-by loans from the International Monetary Fund
to restore deteriorating credibility in the international
financial markets.
Markets will also be watching out for comments from leaders
attending the the annual meeting of the Asia Pacific Economic
Cooperation forum (APEC) in Vancouver on Monday.
U.S. President Bill Clinton and Japanese Prime Minister
Ryutaro Hashimoto will hold talks on Monday.
-- Astrid Zweynert, London newsroom, +44 171 542 7792, fax +44
542 52 93, uk.forex.news@reuters.com))
Copyright 1997, Reuters News Service
Companies or Securities discussed in this article:
Symbol
Name
TOKYO:8602
Yamaichi Securities Co. Ltd. |
