Japan outlines drastic bank rescue

By Paul Blustein
The Washington Post

The Bank of Japan outlined plans yesterday to buy billions of dollars' worth of corporate stocks from the nation's banks, one of the most drastic maneuvers yet to revive Japan's economy and rescue its teetering financial system.

An electronic stock board in downtown Tokyo shows share prices down yesterday. But Tokyo market losses narrowed after the Japanese central bank announced it would consider new steps to stabilize banking. Associated Press

The proposed market intervention, extraordinary even by Japanese standards, underscored official fears in Tokyo and overseas that the banking system of the world's second-largest economy could be plunged into a downward spiral by a combination of falling share prices and the banks' loss-ridden balance sheets.

The slide in recent weeks in the benchmark Nikkei stock index to the 9,000 range — its lowest since 1983 — is a serious threat to Japanese banks because they, unlike U.S. banks, own substantial amounts of stock and have counted on portfolio profits to provide much of their capital, a key measure of financial soundness. The banks are suffering significant losses on their stock holdings, raising the specter of further market declines sparking panic, prompting more selling that would be self-reinforcing.

"We want to help (the banks) reduce the impact of falling stocks," said Masaru Hayami, Bank of Japan governor, at a news conference in Tokyo.

Details are still being worked out, but the central bank would purchase millions of dollars of the banks' stock holdings — which total about $200 billion — at market prices. It would hold the stocks for about 10 years, Hayami indicated.

He declined to say how much stock might be purchased, and did not make it clear whether the initiative would go ahead or was simply being considered. "

The Bank of Japan should take steps to eliminate worries. Call it crisis prevention or stabilization," Hayami said.

He acknowledged "there is no central bank in the advanced world that buys shares" — although in one prominent case during the 1998 Asian financial crisis, the Hong Kong financial authorities went on a brief stock-buying binge to combat what they charged was an orchestrated attack on their markets by foreign speculators.

The initial reaction in financial markets suggested investors were taking the plan seriously. Hayami's 2:45 p.m. news conference took the market by surprise, and the Nikkei, down almost 300 points at one point, reversed course and closed at 9,472.06, off 71.88 points.

Many analysts saw an element of desperation in the move. But some said it could provide the basis for a broader initiative to lift Japan out of a decade of economic doldrums. Japanese policy-makers have balked so far at the two major steps that economists widely agree are essential for a lasting recovery: a painful disposal of hundreds of billions of dollars in bad loans held by the banks, and an extraordinarily powerful expansion of the money supply to combat deflation.

"This is the BOJ panicking," said Adam Posen, a Japan specialist at the Institute for International Economics. "But it could be good news, because it could be part of a deal where the BOJ finally ends deflation and the government finally forces the banks to deal with loans.

"So far, though, there's no explicit deal," he said, and the stock purchase could well end up being "a stopgap measure."

Richard Medley, who heads an international political-economic advisory firm, agreed. "This is a measure of born of some desperation, but it is also a powerful potential beginning of a way to deal with the 12-year recession in Japan."

Medley noted that Hayami had prodded Prime Minister Junichiro Koizumi for months to deliver on his pledge to clean up the banking system so lenders could begin functioning again without the burden of bad loans.

Powerful political forces — small businesses and construction firms that would be forced out of business if the banks had to unload bad loans — have blocked the government from going too far in bank restructuring. But yesterday's announcement is aimed at "putting the whole debate over the banking system firmly in the public mind in the most aggressive powerful way," Medley said, while demonstrating the central bank's readiness to adopt unorthodox policies.

A big danger, however, is that the move will fail to generate a grand bargain with the prime minister and Japan's political barons and end up being just another in a decade-long string of ineffective initiatives. In recent years the government has announced countless public works packages and tax cuts, to little avail; and the Bank of Japan has slashed interest rates to zero without sparking recovery.

Authorities also have periodically launched schemes — known in Japan as PKOs ("price-keeping operations") — to boost the stock market, with short-term success. They included exhortations by powerful bureaucrats to insurance companies to buy shares.

The absence of a grand deal this time around, would be "bad news," Posen said, because an intervention might simply lift the stock market temporarily and thereby help banks avoid having to report deeper losses when the first half of the fiscal year ends Sept. 30.

"It will mean the BOJ acquires a big chunk of corporate stock that will continue overhanging the market, and until they sell it, nobody will be willing to take new positions," Posen said.