Global Agenda: Sorry, closed

Times have changed, even in Japan.

In a previous era, not that long ago, the people responsible would - on their own initiative and without prompting - have committed hara-kiri, jumped into the nearest volcano or, at the least, shot or hanged themselves in the privacy of their own offices. However, times have changed, even in Japan. So when the Tokyo Stock Exchange is forced to stop trading across the board, all you get is a public outcry and a round of "very sorry"-style apologies. Doubtless, some of the big shots will be forced to take early retirement and some may even feel genuine shame and disgrace. But that could just as well be true if the same thing had happened in Stockholm or Buenos Aires - except that Sweden and Argentina have no pretensions to being one of the great economic and financial powers of the world. Japan does, which is why the sense of national disgrace has been so pronounced over the last few days - because what happened has made a mockery of that pretense. So what happened? For the benefit of those readers too wrapped up these last few days in the Labor Party primaries or the failure of the Israeli handball team to qualify for the world championships, here's the update. The Tokyo Stock Exchange registered sharp falls on Monday, Tuesday and Wednesday, against a background of rising oil prices and, more dramatically, an ongoing investigation into an Internet company, Livedoor. The latter has become a symbol of a new, more aggressive and entrepreneurial attitude on the part of the Japanese corporate sector. The company is charged with cooking its books and various other pranks, with the inevitable result that its bloated share price has taken rather a tumble. Although Livedoor is not a major corporation, its tsores triggered a wider sell-off as small private investors, many heavily leveraged because of excessive use of margin, charged the exit door. The fact that the market dropped some 9% in three days, and that other global markets fell in sympathy, is not terribly important. Tokyo was overdue for a correction after an extended run in recent months - and on Thursday prices bounced back by over 2% as "bargain-hunters" re-entered the fray. What is far more important, and what has disconcerted everyone - especially the foreign investors who have been driving the Tokyo market upwards - is that the exchange was forced to end trading 20 minutes early on Wednesday, and will close half and hour early until further notice. The early close on Wednesday was caused by the sheer volume of orders, which threatened to crash the trading system, and by the fact that these orders were overwhelmingly on the sell side. The threat of the computers seizing up is not a theoretical concern in Tokyo - it actually happened just a few weeks ago. It will happen again whenever there is exceptionally heavy trading, because the system's capacity is limited (to a turnover of some 4.8 billion shares a day). This is the source of the national shame and anguish and of the resultant uproar. Instead of the flawless efficiency expected of Japanese systems, especially on the part of the Japanese themselves, we have the spectacle of repeated failures occurring in the full glare of the global spotlight. It's like one of the famous Japanese "bullet trains" going off the rails and crashing into an apartment building - unthinkable, until it actually happened a couple of years ago. The Japanese may not be what they used to be or are cracked up to be in terms of efficiency and quality control, but it's a fair bet that after this latest screw-up they'll sort out what went wrong and set it right. But the wider implications of these events are far more unsettling. First, the idea that Tokyo is a serious stock market has been dented once again. That is not to say that it will now collapse. On the contrary, it is likely to continue its bull run, albeit at a slower pace. But it has again been revealed as highly volatile and hence much riskier than New York or London. More importantly, the inherent fragility of a supposedly major market, and the contagion effect of a problem in such a market on other markets, has been starkly exposed. This highlights the fact that the biggest risk in the global financial system is not that prices will go down for some reason or other. It is that trading will cease altogether; what the professionals call "liquidity risk" and what can more simply be considered as financial Armageddon. [email protected]