Tokyo plunge sets tone for market jitters

World markets experienced another volatile session yesterday after Tokyo set a jittery tone with a 770-point plunge.

Higher-than-expected employment figures in America sent Wall Street into an early downward spiral, catching London in the backwash, but after computer curbs to stop volatile trading were triggered three times the Dow Jones index later bounced strongly to close up 78.12 points at 6,703.79.

Stock markets bore the brunt of investors' nerves, but in the US Treasury bonds also tumbled after a government report showed the unexpected rise in jobs last month was increasing wages, fanning inflation and bringing closer a rise in the cost of borrowing. The Labor Department said 262,000 jobs were created last month, more than the 200,000 economists had expected and a worrying inflationary pointer, analysts said.

Worries that the cost of American money would rise soon helped push the yield on 30-year government bonds to their highest level since September. "Slowly but surely the market's beginning to factor in a bit of a tightening," said one US fund manager.

The fall in Tokyo took the slide in the Nikkei index to more than 2,000 points in the year's first full week of trading - according to one estimate a sum half the size of Canada's whole economy has been wiped off Japanese stocks over the past week. At 17,303.65, the benchmark Japanese index has fallen more than 10 per cent in only five dealing sessions to its lowest level for 17 months.

It has been the largest five-day decline since 1990 when the Japanese bubble economy burst and the stock market started a fall that wiped out half its value in less than two years.

Selling in Tokyo has reached panic proportions according to some market observers with eight shares falling for every one that has risen. "They're selling the good as well as the bad," one Japanese fund manager said. Another added: "The market is melting down."

In London shares were hit by an early 67-point fall on Wall Street, closing too soon to catch the afternoon recovery in New York, and an unexpectedly downbeat assessment of December retail sales from the Confederation of British Industry, which was compounded by a profit warning from catalogue retailer Argos.

The FTSE 100 index closed 30.4 points lower at 4,056.6 as the early Wall Street drag was tempered by sluggish manufacturing output figures which appeared to increase the Chancellor, Kenneth Clarke's chances of getting to the general election without the need to raise interest rates further.

They showed an unexpected drop in manufacturing output last month.

Some City experts blamed the recent strength of the pound for the setback.

But the Treasury and other City economists said the decline was probably a blip, as it was too soon for sterling's rise to have had much impact.

The pound dipped in reaction to the fresh hopes that Mr Clarke would get away with leaving the cost of borrowing unchanged before the election. It fell by a pfennig to close at DM2.6635.

Manufacturing output fell by 0.5 per cent during December, with declines across a wide range of industries.

Higher energy output due to bad weather took total industrial production up 0.4 per cent during the month.