The global credit crisis claimed its first Japanese financial institution today and the government looked to prop up smaller banks, as Tokyo shares suffered their biggest rout since a 1987 crash.
Government ministers played down the risk of contagion from the collapse of an unlisted, small insurer in Japan, which has been a safe haven in a global crisis that has destroyed banks across the United States and Europe.
But spooked investors stampeded for cash before a long weekend, freezing one of the last functioning money markets in the industrialised world and pummeling stocks.
The Nikkei share average tumbled 9.6 per cent, taking its losses for the week to 24 per cent, following a dizzying slide on Wall Street. "This is panic. New York, the currencies - there's nothing left for us to trust," said Takashi Ushio, head of investment strategy at Marusan Securities.
"Investors are scurrying to convert to cash. A lack of confidence is coupling with panic."
Japan's largest banks are still solid and expanding overseas, but sliding demand in Japan's Western export markets is dragging the economy towards a recession, with bankruptcies escalating in the property sector and among small businesses.
Then Yamato Life Insurance Co failed and the government said it may revive a bank rescue law from the 1990s banking crisis to help smaller lenders. One newspaper reported Tokyo may set up a $100 billion fund.
Panic spread like wild fire across Asian markets on Friday. Hong Kong shares sank 7 per cent while Singapore declared its first recession in six years and pressure grew on the Group of Seven rich nations to halt a global spiral of financial distress and slowing growth.
Financial policy makers from the G7, including Japan, will meet in Washington on Friday to consider what to do next, as bank bailouts, interest rate cuts and cash injections have failed to reassure investors.
After arguing for months that Japan had avoided the worst of the global financial crisis, its leaders acknowledged they were increasingly worried about the stock falls.
"(Share prices) have fallen to the level where they can hurt firms' funding. So I have instructed the ruling coalition to come up with steps," Prime Minister Taro Aso told reporters.
The yen soared as investors fled riskier investments elsewhere, while Japanese government bonds were crunched.
The Bank of Japan tried to unclog the pipes of the banking system by injecting 4.5 trillion yen ($45.5 billion) ahead of a holiday in Japan that had investors worried what might happen on their three days off.
Reuters