Japan effectively bans type of stock short selling to calm markets

TOKYO, Oct. 28 Kyodo - Japan effectively banned a type of stock short selling on Tuesday to help calm domestic stock markets, which plummeted to a 26-year low Monday.

Although the measure will formally take effect through revisions to relevant
ordinances, the Tokyo Stock Exchange asked securities firms at the request of
the Financial Services Agency to voluntarily refrain from receiving orders for
transactions known as ''naked short selling,'' effectively banning such deals.
The move prompted the stock markets to stage a sharp rebound in the afternoon.
The effective ban on naked short selling came ahead of the originally scheduled
date of Nov. 4, as Prime Minister Taro Aso instructed the government to do so
to quickly respond to stock plunges.
The FSA is also teaming up with the Securities and Exchange Surveillance
Commission and the Tokyo bourse to probe past violations of Japanese
regulations on stock short selling, Finance Minister and Financial Services
Minister Shoichi Nakagawa told a news conference.
Short selling is believed to be one factor behind the recent market tumble. In
such trading, a large volume of shares are borrowed and sold in the hope that
the shares can be purchased later at a lower price.
Naked short selling refers to transactions in which traders sell stocks without
borrowing them first.
''Yesterday, we announced market stabilization measures, but stock prices
continued to fall,'' Nakagawa said.
''U.S. and European authorities have introduced similar steps and we lag behind
them,'' he said. ''We decided (to move up the short selling ban) as we thought
it could be dangerous for the Tokyo stock market if we do not take action
immediately.''
On the TSE on Tuesday, the key Nikkei index briefly fell below the 7,000 line
in the morning for the first time since October 1982. Backed by the
announcement of the plan to front-load the ban on naked short selling, however,
the index rebounded sharply in the afternoon and closed the day at 7,621.92, up
459.02 points or 6.41 percent from the previous day.
The FSA said Monday that the government will legally mandate that short sellers
with a certain selling position report their transactions to bourses from
mid-November.
Regarding the foreign exchange market, Nakagawa said the Group of Seven
economies' warning Monday in connection with the yen's recent sharp rise
relative to the U.S. dollar and other major currencies had some effect.
''We released a statement on a common G-7 stance because rapid movements (in
currency markets) are harmful for every country,'' Nakagawa said at the news
conference. ''There were no abrupt changes yesterday, so I believe it was
effective.''
Economic and Fiscal Policy Minister Kaoru Yosano said in a press conference
that excessive volatility in foreign exchange markets is ''not desirable for
all the countries.''
Yosano said he believes the yen's ''remarkable surge'' against other currencies
over the past week ''does not at all reflect fundamentals.''
On Monday, Britain, Canada, France, Germany, Italy, Japan and the United States
expressed concern about the yen's recent sharp appreciation relative to the
U.S. dollar, euro and other currencies in a rare statement singling out the
Japanese currency.
The G-7 paper was issued at Japan's request, after the U.S. dollar tumbled last
Friday in London to a 13-year low in the upper 90 yen range and the euro fell
to 113.79 yen, its lowest level since May 2002, amid investors' risk-aversion
moves.
On Tuesday, the U.S. dollar staged a strong rally against the yen in Tokyo,
topping 96 yen briefly. At 5 p.m., the dollar traded at 94.54-56 yen against
92.95-98 yen late Monday in Tokyo.