By Tetsushi Kajimoto
TOKYO (Reuters) - Japan attempted on Tuesday to hold back the threat of the global credit crisis by curbing the ability of investors to bet on falling stock prices and tried to play down the rapid rise in the yen, saying it did not reflect economic reality.
Reflecting the economic impact of the yen's strength, automaker Nissan said the currency's rise made it difficult for the company to compete and it expected the global crisis to extend into 2010.
With U.S. automakers are also feeling the pinch from the downturn, General Motors Corp and Cerberus Capital Management asked the U.S. government for a $10 billion rescue package to support a merger between GM and Chrysler LLC, sources familiar with the talks said on Monday.
The financial storm, which began with failing U.S. mortgages, has mushroomed into a worldwide rout as investors dump stocks and commodities, shun higher-risk emerging markets and seek out the safest government bonds and currencies.
Asian stocks fell for a fifth straight session on Tuesday and Tokyo's Nikkei average slipped to a 26-year low at one point, before recovering.
Japan's Finance Minister Shoichi Nakagawa said his ministry planned to impose a ban on so-called naked short selling from Tuesday, bringing forward the move by a week.
Naked short selling is a tactic where traders effectively sell stocks they don't already own and without borrowing them first. They hope to profit by buying the stocks back at a lower price.
"Similar restrictions have already been put in place in the United States and Europe but Japan has lagged behind," Nakagawa said. "I found a lag of a few days is critical for the Tokyo stock market."
The yen has leapt about 20 percent on a trade-weighted basis this month alone, as investors have unwound risky trades and rushed to the relative safety of the currency.
"The yen's rise in the past week is astonishing, but it does not reflect Japan's economic fundamentals," Japanese Economics Minister Kaoru Yosano told a news conference.
The Group of Seven finance ministers and central bank governors on Monday singled out the excessive volatility of the yen, saying it threatened stability, raising the prospect of currency intervention.
However, the yen barely paused for breath after the statement as investors bet Japan's G7 partners had little appetite to intervene in the midst of the financial turmoil.
Still, market participants on Tuesday were nervous about the possibility of intervention, but doubted it would achieve much unless the wider financial crisis is also resolved.
"Currency intervention alone is unlikely to make the market turn around," said a senior trader at a Japanese trust bank.
The Reserve Bank of Australia intervened in the market for the third day to support the Australian dollar, which fell to a five-year low against the dollar, and dealers said it had also intervened in European hours on Monday.
With the yen trading at 93 per dollar, Carlos Ghosn, chief executive of Nissan Motor Co and Renault, said it would be hard for Nissan to compete.
"It was already difficult to compete at 100, 105, but at 93? It's going to be very difficult for me," he said.
Referring to data showing U.S. car sales plunged 26 percent in September from a year earlier, Ghosn said the worst of the economic crisis was still to come.
"Nobody reasonable is going to tell you that next year we're going to be out (of this crisis)," he told a seminar in Tokyo, adding that the slump could drag on into 2010 or even longer.
MERGER
A U.S. government rescue package to support a GM-Chrysler merger, a combination that would control about a third of the U.S. market, would represent the first government funding for the auto sector since the $1.5 billion bailout of Chrysler in 1980.
The funding would include roughly $3 billion in exchange for preferred stock in the merged firm, said one source, who was not authorized to discuss the matter publicly.
A decision could come this week, sources familiar with the still-developing government response said earlier on Monday.
GM has been in talks with Cerberus about buying Chrysler since last month but the discussions have been snagged by difficulty in securing investment or financing.
Tokyo's Nikkei average dropped below 7,000 points at one stage to a 26-year low, but the Japanese bourse, like some other Asian markets, improved during the morning. The index was up 1.65 percent at 12:17 a.m. EDT.
South Korea's KOSPI index, which had failed to get much of a lift from a record interest rate cut on Monday, was up 2.9 percent as of 12:18 a.m. EDT and some dealers saw the government's hand there.
"Institutions are the only buyers in the market, led by pension funds," said So Jang-ho, a market analyst at Samsung Securities. "It's likely that the (pension fund) buying is linked to the government's current efforts to prop up markets."
FED APPROVES
South Korea has felt the brunt of the crisis in Asia and its banks, with their large short-term foreign borrowing, have looked vulnerable to the credit crunch as they struggled to find funds.
There was some relief for two of its big banks on Tuesday.
State-owned Korea Development Bank (KDB) said it had been given approval by the U.S. Federal Reserve to sell up to $830 million in bonds to the Fed in return for dollar funding, the first time a South Korean bank has been allowed to do so.
Kookmin Bank also said it had been permitted by the Fed to directly sell it short-dated bonds.
The Fed had signaled last week its funding of short-dated securities purchases to free up frozen lending markets could include a wider range of issuers than a previously selected 50 financial institutions.
The purchases are aimed at alleviating strains from the global crisis in short-term funding markets, in particular in commercial paper and certificates of deposit.
More U.S. banks lined up for government cash on Monday
Financial companies including Comerica Inc, SunTrust Banks Inc and State Street Corp agreed to sell stakes to the U.S. Treasury Department in exchange for cash infusions, part of the $700 billion rescue plan approved by Congress earlier this month.
Despite a rout in markets, signs are emerging that government efforts to revive credit markets are beginning to pay off.
London interbank lending rates have eased and the U.S. Federal Reserve set the terms for its program to buy commercial paper, bolstering a market that is vital for funding companies' day-to-day business activities.
DOW STILL FALLS
The Federal Reserve is expected to trim short-term interest rates at its policy-setting meeting later in the week, and British Prime Minister Gordon Brown hinted that central bank action may be widespread.
European Central Bank President Jean-Claude Trichet said a rate cut next week was possible, but not certain.
Reflecting the reach of the crisis, the IMF said it had reached an agreement with Hungary to provide a "substantial financing package" in coming days that would include funding by the European Union and some European governments.
It agreed on a $16.5 billion loan for Ukraine on Sunday and last week unveiled a $2.1 billion package for Iceland.
In an effort to ease credit strains, the IMF's board is expected on Friday to consider a liquidity swap fund that would provide a group of pre-approved advanced emerging economies with short-term financing carrying few or no conditions.
(Writing by Alan Raybould; Editing by Neil Fullick)