Sanyo Securities was no giant — its call-market default froze Japan

Sanyo Securities concluded that further restructuring was impossible: its losses came from credit extended to affiliated non-bank lenders sitting on non-performing assets. On 3 November 1997 it filed with the Tokyo District Court for the commencement of reorganization proceedings and suspended part of its business, also seeking a preservative order so that customer property could be returned. Its management resigned to clarify responsibility.

The market impact outran the firm. Sanyo's failure produced a default in Japan's short-term call money market, where banks lend to each other day to day, and triggered an abrupt credit crunch. The Bank of Japan framed the event as critical to protecting investors and the stability of the securities market; the Securities Deposit Compensation Fund and the firm's main banks stepped in so that no investor losses would follow from the closure.

It was the first domino of the month that broke Japan's no-failure myth: Hokkaido Takushoku Bank failed on 17 November, Yamaichi Securities announced closure on 24 November, and a regional bank, Tokuyo City Bank, followed on 26 November. The credit crunch those failures unleashed pushed the Ministry of Finance toward a legal basis for public fund injections, enacted in February 1998, and the Financial Supervisory Agency created that June.