Japan Stocks Dive to 3-Year Low on Lehman, AIG Capital Concern

By Masaki Kondo and Toshiro Hasegawa

Sept. 16 (Bloomberg) -- Japanese stocks plunged to a three- year low after growing credit turmoil caused the failure of Lehman Brothers Holdings Inc. and endangered a plan to raise emergency capital by American International Group Inc.

Aozora Bank Ltd. tumbled 16 percent, the most since its listing, after a filing showed it was Lehman's biggest creditor. Tokio Marine Holdings Inc. led a gauge of insurers to the biggest drop since Oct. 20, 1987, the day after ``Black Monday,'' after AIG's debt ratings were cut as it sought fresh funding. Inpex Holdings Inc., Japan's biggest oil explorer, fell by a record after crude sank to a seven-month low.

The Nikkei 225 Stock Average dropped 605.04, or 5 percent, to close at 11,609.72 in Tokyo, a level not seen since July 2005. The broader Topix index fell 59.63, or 5.1 percent, to 1,117.57, the lowest since May 2005. All 33 Topix industry groups declined. Japan's market was closed yesterday for a national holiday.

``If AIG collapses, the impact would be much bigger than that of Lehman's failure,'' said Tomokatsu Mori, who oversees about $935 million at Fukoku Capital Management Inc. ``AIG is a lender to businesses and is very close to the heart of the U.S. financial system. Nobody can buy back into the market until uncertainty surrounding AIG is cleared.''

Lehman, once the fourth-largest U.S. investment bank, was forced into the biggest bankruptcy filing in history yesterday, becoming the latest casualty of the subprime mortgage crisis. Its Japanese unit filed for protection today with 3.4 trillion yen ($33 billion) in liabilities.

AIG, the largest U.S. insurer by assets, had its credit ratings cut by Standard & Poor's and Moody's Investors Service. The downgrades occurred after two people familiar with the situation said AIG is seeking as much as $75 billion in loans.

Lehman Creditors

Aozora dived 16 percent, the most since its November 2006 listing, to 171 yen, even after saying its exposure to Lehman was overstated in the U.S. company's bankruptcy filing. Shinsei Bank Ltd., which was owed $231 million by Lehman, tumbled 16 percent to 314 yen. The Topix Banks Index fell the most since May 2004.

At least seven Japanese banks lent a total of $1.62 billion to Lehman, according to the U.S. company's Chapter 11 filing. Among the largest unsecured creditors are Aozora, which was owed $463 million, and Mizuho Corporate Bank Ltd., a unit of Mizuho Financial Group Inc., according to Lehman's filing.

``Investors feel there is no way out of this stalemate,'' said Hideo Arimura, who oversees the equivalent $1.9 billion at Mizuho Asset Management Co. in Tokyo. ``Nobody knows exactly how Lehman's failure will affect financial institutions globally. That's why Japanese banks are being sold.''

Tokio Marine, Japan's biggest insurance group, tumbled 13 percent to 3,230 yen, while closest rival T&D Holdings Inc. lost 6.3 percent to 5,220 yen. Sompo Japan Insurance Inc. slid 11 percent to 849 yen. Insurers as a group lost the most since ``Black Monday'' in October 1987 when global stock markets plunged.

Tumbling Oil

Inpex lost 11 percent to 894,000 yen, its sharpest retreat since its April 2006 listing and the lowest value since October 2006. Mitsui & Co., a trading company that gets half its profit from commodities, declined 12 percent to 1,429 yen.

Crude oil tumbled below $92 a barrel to a seven-month low on concern that turmoil on Wall Street may weaken the global economy and reduce demand for fuels.

Canon Inc., Japan's biggest office-equipment maker, plummeted 10 percent, the steepest decline since October 1998, to 3,840 yen. Canon will probably post a 12 percent drop in annual profit this year, the Nikkei newspaper reported on Sept. 13.

Train operator Odakyu Electric Railway Co. rose 5.5 percent to 792 yen, making it the second-biggest winner on the Nikkei 225, and Tobu Railway Co. gained 3.2 percent to 516 yen. Yakult Honsha Co., Japan's biggest maker of fermented milk drinks, advanced 4.6 percent to 3,220 yen, the sharpest jumped since Jan. 25.

``With the situation deteriorating to this degree, the only measure investors can take is to buy defensive shares'' such as food makers, Mizuho Asset's Arimura said.

Nikkei futures expiring in December retreated 5.6 percent to 11,580 in Osaka and slumped 5.1 percent to 11,600 in Singapore.

To contact the reporters for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net.