Tokyo Exchange closes early, halted by panic trading

TOKYO -- Panic trading spurred by a widening criminal investigation of a popular Internet startup forced the Tokyo Stock Exchange to shut down 20 minutes early Wednesday as share prices plunged for a second day.

It was the first time trading had to end early because the market's computers couldn't handle a surge of transactions.

The benchmark for the Tokyo exchange slid 2.9 percent Wednesday. The Nikkei 225 index dropped 464.77 points, its biggest one-day drop since May 10, 2004.

That compounded losses Tuesday when the Nikkei fell 2.8 percent amid reports of a widening investigation into allegations that Livedoor Co. had covered up massive losses. The index has fallen nearly 6 percent the last two days.

"Individual and foreign investors are selling in a panic," said Satoru Otsuka, senior economist at Mizuho Research Institute in Tokyo. "The problem is that we have no idea how the Livedoor problem will unfold."

Investors and the Japanese public alike were stunned when prosecutors marched into the Tokyo headquarters of Livedoor on Monday evening on suspicion of violation of securities laws by giving false information.

Livedoor, founded in 1997, offers various Internet services, including consulting, telecommunications, mobile sites and software development. It also has bought up chunks of other companies and managed to raise money by offering more of its own stock.

It is headed by 33-year-old Takafumi Horie, who has risen to celebrity status as a geeky entrepreneur -- a rarity in Japan. He has made unsuccessful attempts to buy a media conglomerate and a baseball team and frequently appears on TV.

The national daily Yomiuri Shimbun reported that Livedoor is suspected of concealing a $8.7 million deficit for the full-year results ending September 2004.

Horie denies wrongdoing, and authorities would not comment on the Yomiuri report.

The Japanese media have dubbed the whole affair "Livedoor shock," which has garnered banner headlines and intense news coverage since the raid.

Internet-related stocks like Softbank Corp. and Yahoo! Japan got hit in the market's plunge, but blue-chip electronics firms like Canon Inc., Toshiba Corp. and Sony Corp. also fell.

Those losses could also be partly attributed to investor disappointment over to earnings results Tuesday from U.S. chipmaker Intel Corp. and Web giant Yahoo Inc., which were lower than analysts' expectations.

Dealing an extra blow was the unusual warning from the Tokyo Stock Exchange about halting trading as it got flooded with orders and was unable to process them, said Seiichi Miura, investment strategist at Mitsubishi UFJ Securities Co.

Once it became clear the market was selling off for a second day, investors seemed to panic and rushed to sell before the session ended.

"The cause was threefold -- Livedoor, America and a mess-up by the Tokyo Stock Exchange," Miura said. "People got worried about what's going to happen tomorrow if we can't sell today."

Earlier Wednesday, the Tokyo exchange had issued a warning it would stop trading if the system capacity limit of 4 million transactions was reached. As it reached 3.5 million about an hour before the session's close, it announced it would stop trading 20 minutes early.

Trading volume was 3.28 billion on the first section Wednesday, up from 2.465 billion on Tuesday.

The Tokyo exchange plans to delay the start of afternoon trading 30 minutes on Thursday, in anticipation of increased trading volume, Kyodo News Agency reported.

"We plan to restart the exchange as normal and will keep a close watch on how trading develops," Exchange President Taizo Nishimuro told reporters. "Our goal is to handle things in a way that won't invite confusion."

Livedoor's shares were briefly suspended during morning trading and closed unchanged at $5.18, after falling 14.4 percent Tuesday.

The market sell-off could put a big damper on investor enthusiasm for Japanese stocks, which surged 40 percent last year amid hopes for a long-awaited recovery.

Confidence in the Tokyo exchange, the world's second biggest bourse, had already been damaged by a system crash from a computer malfunction Nov. 1, when trade was suspended for all but the final 90 minutes.

The Livedoor probe has had more impact than might be expected because of the attention Horie has enjoyed as a pioneer in new-style management that challenged stodgy tradition.

Geeky entrepreneurs sporting T-shirts and jeans are rare in Japan, and Horie and his defiant mannerisms and glamorous lifestyle fascinated people here.

Livedoor shock underlines the growing pains of the Japanese stock market and economy in a nation where individual investors and mutual funds aren't as widespread as in the United States and some European nations.

Companies like Livedoor that grew by buying up other companies and boosting its and subsidiaries' stock prices are still relatively novel in Japan.