Collateral Damage

At first glance, what made the livedoor scandal so dramatic was that it triggered a sharp stock-market correction. The rally that preceded this two-day panic had gotten ahead of itself, with the Nikkei 225 index soaring 40% since last August. In just six months, the price-to-earnings (PE) ratio for Japan's 1,600 biggest firms had shot up from an average of 18 to nearly 23 on the eve of the raid on Livedoor. The Internet company itself had a bubbly PE of 130, giving it a market value of $6.3 billion. Much of this market euphoria was driven by foreign investors, who...