Japan Markets Dive Amid Internet Probe

Japan's main stock market nose-dived for a second day Wednesday on investor jitters from "Livedoor shock," the widening criminal investigation at an Internet startup that has sparked a sell-off, especially in technology shares.

"It's a big well-known Internet company. It was one of the high-flyers that people thought was doing really well, and it turns out it may have been playing with the books, much like Enron," reports CBS News correspondent Barry Petersen.

The "ripple effect" was pushing prices lower in Europe. And Wall Street could follow suit.

The benchmark for the Tokyo Stock Exchange plunged 2.9 percent Wednesday in a session that had to be shortened by 20 minutes because of a surge in transactions — the first time it has ended early because it could not handle trading volume.

The Nikkei 225 index dropped 464.77 points to close at 15,341.18 points, its biggest one-day drop since May 10, 2004.

Share prices extended losses from Tuesday, when the Nikkei fell 2.8 percent, following Japanese newspaper reports that the investigation that had started Monday was expanding. 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 Monday evening on suspicion of violation of securities laws by giving false information.

Livedoor 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, frequently appears on TV and runs a widely-read blog.

The national daily Yomiuri Shimbun reported Wednesday that Livedoor is suspected of concealing a 1 billion yen ($8.7 million) deficit for the full-year results ending September 2004.

Horie denies any 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 the last two days.

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.

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," said Seiichi Miura, investment strategist at Mitsubishi UFJ Securities Co. "People got worried about what's going to happen tomorrow if we can't sell today."

Earlier Wednesday, the 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, which is a higher measure because each transaction typically involves many shares, was 3.28 billion on the first section Wednesday, up from 2.465 billion on Tuesday.

Exchange president Taizo Nishimuro told reporters the bourse is considering shortening trading hours Thursday. Exchange spokesman Yoshihiro Sano said late Wednesday there was no decision yet.

Livedoor's shares were briefly suspended during morning trading and closed unchanged at 596 ($5.18), after falling 14.4 percent Tuesday.

The market sell-off and the early close of trading 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.

Economics Minister Kaoru Yosano demanded a report from the exchange on its decision to shorten trading.

The aftermath of the Livedoor probe has been greater than what may be expected because of the wide attention its vivacious chief executive Horie has enjoyed in the last couple of years from the Japanese public 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.

As a high-profile issue among ventures, Livedoor was popular among individual investors, and a plunge in Livedoor stock was apt to influence other shares because some people used Livedoor stock as security on loans to buy other technology stock, Miura said.

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.

"This is bad news at a bad time for the Japanese economy, which had been showing some signs of resurgence, after almost 15 years of being in the dumps," said Petersen. "The stock market was on the way up. Now, for two days, it has been almost crashing down dramatically because of the scandal involving an Internet company, and casting doubt on the long-term effort of the Japanese economy to make it back."