Japan's stock jolt tarnishes a brash new business style

Quick, how do you spell stock panic in Japanese? Answer: Livedoor Co.

Not many outside of Japan have heard of the Internet start-up firm, but when prosecutors raided its offices earlier this week the ensuing sell-off on the Tokyo Stock Exchange (TSE) was so huge that orders threatened to overwhelm capacity, forcing an unprecedented emergency shut-down of trading 20 minutes before the market close on Wednesday.

The markets rebounded Thursday, with the Nikkei 225 recovering some 2.3 percent following the 5.7 percent plunge over the course of Tuesday and Wednesday. Helping to restore investor cool was the sense among analysts that the recent stream of positive economic data is likely to continue and that Japan's economic fundamentals remain all but unaffected by the brouhaha over Livedoor.

"Corporate profits for the fiscal year 2005 are likely to top all-time highs, which will lead to an increase in household incomes and business reinvestment," says senior economist Yoshihide Mukoyoshi at Mitsubishi UFJ Securities. "Profits will continue to rise next fiscal year, so there is a high possibility that the virtuous cycle in the economy will continue."

The main casualties of this week's white-knuckled stock ride will likely turn out to be Livedoor, its 33-year-old president Takafumi Horie, and the TSE itself. Indeed, the TSE has come under fire for adding to the panicky mood by having to halt trade early due to its creaking computer system. Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and Industry, called the emergency shut down "an extremely serious situation."

The government's top spokesman urged the bourse to quickly take appropriate steps to regain the confidence of investors. The slap on the wrist comes only a month after the resignation of the bourse's president when a system failure contributed to the inability of a securities company to retract a misplaced order, leading to a loss of $340 million for the firm.

In the longer term, the Livedoor scandal may deal a blow to business confidence among a younger generation of entrepreneurs in the IT field. While not a major firm by Japanese standards, Livedoor is something of a poster child for a more aggressive way of doing business that is anathema to the highly traditional business culture here.

The company and its subsidiaries are suspected of violating a number of laws related to providing misinformation to investors, and disguising cash buy-outs of other firms as stock swap deals in an effort to boost Livedoor's share price. The company is also being investigated for falsifying its financial statements.

Thursday, the company said it believes it did not break any disclosure rules. "We will continue our investigations to see whether our actions could be construed in any other way," Livedoor said in a statement.

The firm began as a website designer only 10 years ago. But it captured national headlines in 2004 when Mr. Horie tried to muscle in on the clubby world of Japan's professional baseball league with plans to buy a team. In the end, the bid was unsuccessful but helped prepare the ground for another young company to set up the first new team in Japan's pro leagues in 51 years.

The brash young president continued to make news in 2005 by actively pursuing corporate acquisitions and attempting a hostile takeover of one of the nation's highly conservative broadcasting groups. Over recent years, Livedoor has entered dozens of new businesses including car sales, publishing, securities trading, mail order goods, and credit card services to become a conglomerate with estimated annual sales of $68 billion.

Although old school business leaders have reviled him from the beginning as a T-shirt-wearing upstart, Horie is a success symbol for many Japanese in their 30s who have had little to celebrate during careers that span 15 years of economic stagnation.

Underscoring his high profile, the Liberal Democratic Party persuaded him to launch an independent bid for the seat of a notorious party rebel in last year's general election. Although he lost the race, many top LDP officials campaigned with Horie and are now attempting to distance themselves from the rapidly evolving scandal.

The TSE has given Livedoor until Friday to submit the findings of its internal probe. The exchange may then decide whether to delist the company. Livedoor's stock has fallen 40 percent from its Monday close.