In bygone days a disgraced Japanese official would end it all by falling on his sword. Yesterday, the tearful president of Yamaichi Securities, Mr Shohei Nozawa, practically collapsed on his microphone as he bowed deeply in shame at the Tokyo press conference announcing the failure of Japan's oldest brokerage.

The biggest financial catastrophe to hit Japan since the second World War has profoundly shocked the nation. Yamaichi is a household name and has a staff of 7,500 (it was for them that Mr Nozawa was weeping).

The president of a smaller Tokyo securities company compared it to an atomic bomb exploding in the economic world.

In bars in central Tokyo, people out to enjoy a national holiday found themselves gazing mesmerised at the television sets, which cancelled programmes to give full coverage to the disaster. Some distraught investors arrived at the brokers' office block in a vain attempt to get their savings out on a bank holiday - a sign of the panic which could ensue today if savers are not reassured that the money is secure.

Coupled with the shock decision by Korea on Saturday to seek help from the International Monetary Fund, the disgrace of Yamaichi Securities ushers in a new and more ominous phase of Asia's financial crisis, which has already pulled down Thailand, Malaysia, the Philippines and Indonesia.

South Korea, until recently the proudest and seemingly invincible Asian tiger, is now in deep crisis, partly because Japanese credit dried up. IMF officials are in Seoul negotiating a rescue package because its financial and economic problems could have a ripple effect on a globalised economy.

The consequences of a bank failure in Japan, the world's second-largest economy after the United States, would be so serious, however, that it could bring about a world-wide economic slow-down in growth. In particular, if Japan has to start selling off its massive holdings in US Treasury bonds, the impact would be felt painfully in the United States, with rising interest rates and unemployment.

Japan also has major investments in many of the European economies, including Ireland, and a financial melt-down in Tokyo could be a setback for its major companies overseas.

The Japanese government took emergency measures yesterday to prove to the world that it is not a teetering domino. The Bank of Japan, after an emergency meeting, offered an unsecured loan to Yamaichi to ensure that its clients' and depositors' assets are protected - a decision designed to shore up investor confidence in Japan's financial system.

Many analysts point out that the country is now in a period of adjustment and that the long-term effect of the closure of Yamaichi, Japan's fourth-largest brokerage, will actually be to clean up a murky area in the country's business world by weeding out failing or corrupt financial institutions.

Indeed, the process has been going on for some time. A Finance Ministry official pointed out that 20 financial institutions had collapsed over the last three years without turmoil. Sanyo, the country's seventh-largest broker, failed earlier this month, and Japan's 10th-largest bank shut last week.

Yamaichi's collapse came about because of the exposure of corrupt practices which are not associated to the same degree with the three other big brokers, Nomura, Daiwa and Nikko. It had 3,200 billion yen in liabilities and had concealed another 200 billion of debt, according to the Finance Ministry. The secret debts were hidden from Japanese regulators by shifting them from one account to another, an illegal practice to protect favoured clients known as tobashi.

Yamaichi was buying back stocks that had fallen in value from clients who wished to hide investment losses. It was passing them on to other customers who were given incentives or favours. Some of the transactions went through companies registered in the Cayman Islands to avoid detection.

The crisis is a severe test for the government of Prime Minister Mr Ryutaro Hashimoto. He has promised a big bang deregulation of the Japanese financial market next year.

Now he is under pressure to take the politically unpopular step of pouring in public money to maintain confidence in the system.

Analysts say he has to show that Japan can absorb a major bank or securities failure without the domino tipping over, and that the system of lifetime employment and papering over financial failures, which was the foundation of Japan Inc, is finished. He is trying to resist using public money.

His spokesman, Mr Hiroshi Hashimoto, said yesterday: "I don't think it is necessary for us to use our taxpayers' money. What we should do is to deregulate the economy and leave more room for the private sector to engage in commercial and financial transactions." He added significantly that it was all a question of psychology.

"Many Asian countries are now facing difficulties," he said. "We have got to try to recover the confidence of the market."

There is much at stake. Economic turmoil could turn into political instability. The very fact that there is talk of a new domino theory - in which fiercely competitive currency devaluations and loss of confidence undermine Asian nations - shows how crucial psychology will be in the days ahead.