Nikkei Posts Biggest One-Day Loss Since 1987 Crash

Japan's Nikkei stock average fell 9.6 percent on Friday for its biggest one-day percentage loss since the 1987 stock market crash on growing fear the financial crisis will spark a global recession.

The Nikkei, which has fallen for seven straight days, lost 24 percent on the week, more than twice what it lost the week of the 1987 stock market crash. It has lost 46 percent this year.

"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."

Sentiment already battered by a fall in New York shares and news that a Japanese real estate investment trust had failed grew worse after a bankruptcy filing by unlisted Yamato Life Insurance spooked the market.

The benchmark Nikkei 225 Average sank 881.06 points to 8,276.43, its lowest close since May 2003. At one point it was down more than 1,000 points. The broader Topix shed 7.1 percent to 840.86.

Market fears were fed by New City Residence Investment's announcement on Thursday that it had filed for court protection from creditors, making it the first Japanese real estate investment trust to fail as fallout from the credit crunch spreads.

"The Nikkei has lost close to 20 percent in three days alone, and it's certainly not as if economic fundamentals have worsened that much in that time period," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management. "It's basically all psychological. And it's not going to stop until fears about the financial system have been erased."

The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

Action Needed Now

"Fears about the U.S. financial system have been rekindled. The U.S. government is still debating whether it would inject money into financial institutions. It needs to act now even if that would be beyond the current law," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

But market participants said the market had lost the ability to move on expectations alone and that only concrete action, or firm promises and a clear timetable, would help. Investors were also warry of holding large positions ahead of a three-day weekend in Japan, with Monday a market holiday. "This has become a bit of a jinx, especially since on the last Japanese three-day weekend in September, Lehman Brothers failed," said Masayoshi Okamoto, head of dealing
at Jujiya Securities.

Tech stocks were especially battered, with Kyocera losing 13.3 percent to 5,660 yen and TDK Corp down 13.1 percent at 3,320 yen, but selling also extended to defensive shares that had been popular even during recent falls. Fast Retailing lost 10.5 percent to 8.560 yen, becoming
the biggest drag on the Nikkei 225, and Terumo Corp lost 11.6 percent to 3,820 yen.

Trade picked up on the Tokyo exchange's first section, with 3.27 billion shares changing hands, compared with last week's daily average of 2.08 billion.

Declining stocks outpaced advancing ones by more than 8 to 1.

South Korean Shares Plunge, Wild Swings in Won

South Korean shares also plunged in panic selling after Wall Street tumbled on deepening fears the latest moves by authorities worldwide to unfreeze credit markets will fail to prevent a global recession.

Mounting fears Asia's fourth largest economy could be especially vulnerable to the global downturn also triggered a second day of wild swings in the won, one of the region's worst performing currencies.

And the country's finance minister is flying to New York where, on the sidelines of the annual IMF/World Bank meetings, he will meet leading U.S. bank executives to try to secure expanded credit lines for South Korean banks.

CNBC.com Pre-Markets

• World Markets Overview
• U.S. futures and Pre-Market Data
• Get Credit Spreads Data Here

"The market's in a panic, and it is moving completely out of the norm. Extreme volatilities in forex markets are worsening sentiment. It's critical that some stabilisation is seen in won-dollar rates," said So Jang-ho, an analyst at Samsung Sec.

At one stage in morning trading the main stock market index was down 9 percent to its lowest level in nearly three years. It later recovered slightly. It was a similar picture elsewhere in the region with Japanese and Australian share markets both seeing precipitous falls.

On the local currency market, the won had another volatile day, starting the morning by tumbling 5 percent. It recovered almost as quickly, though it was not clear whether the authorities had intervened, as they had the previous day, by selling dollars to prop up the local currency. In the morning session, the won was quoted at 1,413.90/1,414.90 to the dollar, still
below Thursday's domestic close of 1,379.5.

The share slump saw a rush of investors heading to safer treasury bonds where prices surged.

Many analysts say South Korea has looked especially vulnerable to the financial storm that has toppled banks from as far afield as the United States to Iceland.

Its central bank rushed to join this week's round of interest rate cuts by authorities around the world and signalled it was ready to trim them further to help economic growth, which looks set to fall to a six-year low next year.

More From CNBC.com ...

• Singapore in Recession, First Policy Easing in 5 Years
• China Confident It Can Weather Crisis, Will Cooperate
• Market Insider: Praying for Capitulation
• The Credibility Gap: What a CEO Says vs. The Truth
• US to Start Buying Stakes In Banks by Month's End
• Global Crisis Hits Japan's Financial Sector

But South Korean banks are struggling to find funds to pay off their foreign debts in increasingly tightly squeezed liquidity and there are concerns some heavily leveraged parts of the economy, such as construction and smaller firms, could fail, triggering wider problems.

Officials dismiss comparisons to the 1997-98 Asian financial crisis that brought South Korea's economy to its knees and say they are able to pump liquidity into the system as necessary.

Finance ministers from Japan and South Korea plan to meet on Saturday in Washington to discuss the global financial crisis on the sidelines of the IMF/World Bank annual meetings, South Korea's Finance Ministry said in a statement.

Finance Minister Kang Man-soo also plans to meet executives of Citigroup, Morgan Stanley and Goldman Sachs to seek their support for his country's efforts to secure expanded credit lines to local banks.

And later this month in Beijing, the leaders of South Korea, Japan and China will hold a summit on how to address the growing crisis that is hammering their economies.

Copyright 2008 Reuters. Click for restrictions.