A flood of sell orders forced the Tokyo stock exchange to close early as investors stampeded from the world's second-largest share market yesterday, spooked by fall-out from an investigation into a high-flying Internet firm.
The Tokyo Stock Exchange, where shares were down almost 5 percent at one point, suspended trading 20 minutes before the normal closing time after the number of trades threatened to overwhelm its computer system's capacity of 4.5 million per day.
The exchange has been hit by a series of system problems in recent months, including a glitch that halted business for almost a full day late last year.
But this was the first time that it was forced to halt trading as a result of capacity constraints since it opened its doors in its current incarnation in 1949.
Yesterday's shut-down dealt another blow to the image of the exchange, which has plans to list its own shares.
"It is an embarrassment for this to happen in the world's second-largest economy and that's the emotional aspect of the debate," said Hideo Ueki, chief investment officer at UBS Global Asset Management Japan.
"I'm pretty sure the NYSE has only had to shut down for snow or a black-out."
Internet firm Livedoor Co., a favourite of small investors, was raided by prosecutors on Monday.
News of the raid extended a sell-off that has wiped out more than US$300 billion in shareholder value - about equal to the gross domestic product of Sweden - in just three days.
The firm is suspected of fudging financial reports and spreading false information to boost its share price.
The exchange, which skimped on investment in its computer system during Japan's decade of economic stagnation, has had to cope with an explosion in trade as individual investors flocked to the market, in part because of cheap access over the Internet.
"The current situation is totally unexpected," said Tokyo Stock Exchange President Taizo Nishimuro, who took over just last month and was charged with upgrading the computer system.
Nishimuro said that the bourse, which had already planned to increase capacity to 5 million shares on January 30, would consider shortening trading hours on Thursday and beyond if necessary.
Jiji news agency later reported that the exchange planned to reopen at the usual time today.
The number of transactions had reached about 4 million by 2:25 p.m. local time, just before trade was halted.
The exchange processed about 3 million transactions on average per day in December.
Some analysts looked on the bright side, saying the overload would speed up the exchange's efforts to improve its systems.
"A sudden jump in trading volume like this would catch off-guard any exchange (in industrialised countries). I'm sure they will fix it," said Hitoshi Yamamoto, President at Commerz International Capital Management (Japan).
News in the afternoon that the exchange was considering a shut-down accelerated selling across the board, pushing down the Nikkei share average by as much as 4.7 percent.
It clawed back to end down 2.94 percent at 15,341.18.
But that was still its biggest one-day fall since April 18, 2005, when it fell 3.8 percent. The broader TOPIX index fell 3.49 percent to close at 1,574.67. Weaker-than-expected earnings by U.S. chipmaker Intel Corp. also weighed on the market.
The share-price tumble also briefly hit the yen, which fell to a day's low of 115.88 yen to the dollar before recovering to around 115.25, and even sent gold prices tumbling.
"The problem has caused a selling climax. Everyone is throwing in sell orders, said Ken Masuda, a senior dealer at Shinko Securities shortly before trade was halted. "Even after five minutes, orders aren't going through. This is ridiculous."
Investigators from the Tokyo District Prosecutors' office and the Securities and Exchange Surveillance Commission raided the Tokyo headquarters of Livedoor late on Monday on suspicion that the company had spread false information to investors.
Newspaper reports yesterday said the company was also suspected of tampering with its financial reports.
Livedoor has so far said only that it would make specific comments after it concluded its own investigations.
The investigation has scared off individual investors, who were a major factor in the Nikkei's 40 percent rise last year. Only last Friday, the Nikkei hit a five-year closing high.
Individual investors now account for about 40 percent of all trades on the Tokyo, Osaka and Nagoya stock exchanges, up from 30 percent last year.
The Livedoor affair also cast a cloud over the aggressive acquisition strategy and money deals practiced by the firm's maverick CEO, Takafumi Horie, and sparked some concern about damage to Prime Minister Junichiro Koizumi's reform agenda.
Horie, 33, ran unsuccessfully for parliament's lower house as a ruling party candidate last September and Koizumi's right-hand man on economic reforms, Internal Affairs Minister Heizo Takenaka, campaigned for him.
Analysts and some investors themselves said, however, that individuals would resume buying once the Livedoor fuss settled down, given Japan's recovering economy and corporate earnings.
"The past two days have been a warning to the market that things have gone too far and that things have started to look like a bubble," said Masayasu Higuchi, 77, who works for a fishing equipment maker, after selling some shares at a packed day-trading center in the Kayabacho, Tokyo's Wall Street.
"I will wait for the market to settle and when the time is right I want to invest again," he added.