The Tokyo stock exchange's attempt to reinforce its position as Asia's largest financial centre took a knock yesterday when its computer system crashed, halting trading in Japan's benchmark government bond contracts.

Hitachi, the electronics conglomerate, has just completed an upgrade of the system aimed at making it more user-friendly.

The failure - the second in a fortnight - is an embarrassment for the stock exchange. The combination of the trading halt and a recent increase in the supply of bonds led to increased volatility and price distortions yesterday. Hedging sales increased as dealers who had bought four-year government notes found it impossible to sell them to investors.

The system failure caused an immediate sell-off in bonds, but some investors argued the price decline was the beginning of a new trend. Mr Stuart Baker, managing director at Barclays Capital Japan, said: "Given the Japanese fiscal position, the decrease in bond prices does not come as a surprise."

Mr Baker pointed out that supply had risen recently and that a further increase could be expected in view of the potential rise in government expenditure and falling revenues.

Data released yesterday showed that tax revenues in October had fallen 14 per cent. On Tuesday, the volume of the 4-year note auction reached 900 billion yen (£5 billion), much higher than the usual Y400 billion to Y500 billion.

Following Hitachi's systems upgrade early last month, the stock exchange has been struggling with bond futures transactions. Hitachi has pledged to increase the number of staff assigned to oversee the system, the exchange said.

The new system was introduced in part because the previous system had become worn but also to take advantage of a much faster processing rate and the ability to view a wider range of information, the exchange said.