Japan’s Stock Market: How serious a shock?

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How seriously has the Livedoor scandal affected the Japanese financial markets? Despite all the market and media turmoil, most institutional investors and analysts, inside and out of Japan, are quick to note that Livedoor is not a large company, even by Japanese standards, and, therefore, they argue that the “Livedoor Shock” now consuming Japan risks blowing the economic impact of the company’s woes out of proportion. Peter Morgan, Chief Economist for HSBC Securities in Tokyo calls Livedoor a symbolic battle and a specific case that has little implications for the rest of the economy. “The economy is better now than it’s been for quite some time,” he says. “The fundamentals still look pretty good.”

As for the volume of orders that prompted the stock exchange’s early closing, Takuji Aida, Chief Economist at Barclays Capital Japan, blames undisciplined individual investors—a category that Livedoor’s CEO Takafumi Horie helped cultivate. As in the United States seven years ago, the rise of Japan’s Internet sector has stoked a surge in online brokerage companies and individual stock investing. According to some estimates, individual investors now account for 50% of the Japanese market’s total trading volume. “Many Japanese households have started to join in the stock market, and a lot of money went into technology stock shares,” says Aida. “They got panicked. This should be a lesson for them.” Indeed, on Thursday, Japan’s market staged its biggest rally in 20 months and exchange chairman Taizo Nishimuro assured investors that it would double its capacity by the end of the year.

However, any indication that the accounting and securities manipulations are widespread rather than isolated to Livedoor could send markets reeling once again and derail Japan’s fitful recovery. Morgan of HSBC says there is no sign of that so far, “but if Livedoor had that brilliant idea, it’s possible that other companies might have had similar thoughts.” For now, however, most analysts TIME contacted contend that Japan’s stock market, its economy, and the financial reporting controls are fundamentally strong. In fact, Peter Tasker, an economist at Dresdner Kleinwort Wasserstein in Tokyo, maintains that the “Livedoor Shock” could be seen as a long-overdue correction to the speculative froth that powered the Japanese stock market to a 40% increase last year. With additional reporting by Ilya Garger/Hong Kong and Toko Sekiguchi/Tokyo