The Bank of Japan pledged yesterday to buy €8.5 billion in stocks held by Japanese banks, saying their biggest risk was exposure to share markets and that the measure would help stabilise the country's financial system.
It revives a scheme from earlier this decade to head off a domestic banking crisis and comes as Japanese banks seek to limit their losses from the Tokyo stock market that has fallen 35 per cent since the end of last March in the face of the global financial storm.
"If you look at what kind of risks big Japanese banks have now, the biggest risk is not credit risk. It's volatility in share prices," said Bank of Japan Governor Masaaki Shirakawa.
"Share prices fluctuate on various factors, not just domestic factors. Right now international markets are not stable and Japanese share prices are falling. Those banks always have to consider such risks. That's the reality."
Mr Shirakawa said the central bank decided to act ahead of the end of the financial year in March, when companies will finalise their accounts and because anxiety over the Western financial system is growing again. The BOJ move was announced as Japan's Sankei newspaper said the country's biggest bank, Mitsubishi UFJ Financial Group, would post a loss for April to December and slash its annual forecasts, reflecting both stock losses and a rise in bad debt.
Smaller lender Shinsei Bank said it would swing to a net loss of €417 million in the year to the end of March. Last week, Mizuho Financial Group posted a €1.24 billion loss for its third quarter, citing stock losses.
The BOJ will buy shares from banks that operate internationally and those that hold shares worth more than half of their Tier 1 capital. About 30 banks including big and regional lender are thought to be eligible to apply based on those criteria.
Some analysts questioned whether the BOJ's measure would do much to help an economy, which like much of the developed world, is already deep in recession.
"If anything it is a positive. But it remains to be seen how much of an impact it will have on stabilising the broader financial system," said Jason Rogers, credit analyst at Barclays Capital in Singapore.
Under the scheme, the BOJ will buy up to 8.5 billion worth of listed shares held by Japanese banks up until April 2010. It will buy shares in companies that have credit ratings of at least BBB-minus, the lowest investment grade.
The BOJ's measure follows a government plan yet to be approved by Parliament to buy up to €174 billion in shares from banks. It would revive a similar scheme the BOJ ran earlier this decade when authorities were trying to stave off a domestic banking crisis.
The BOJ's plan is the latest in a string of support measures as the world's second-largest economy struggles with recession.
Analysts estimate Japan suffered its biggest contraction since 1974 in the final quarter of last year after shrinking in the second and third quarters of the calendar year.
Data yesterday showed Japanese overtime pay, a barometer of corporate activity, marked the biggest annual fall in nearly 16 years in December.
The central bank has cut interest rates to 0.1 per cent and decided to buy corporate debt to smooth corporate funding, but markets have remained jittery over the global downturn.