Financial thoughts

Japan outlined steps to ease strains on its banks, as Tokyo stocks hit a 26-year low on fears that lenders will need billions of dollars to boost capital, and as the yen rose despite a G7 warning of excess volatility.

Investors dumped Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz) and other major Japanese banks, on concern that their heavy exposure to domestic equities could trigger the kind of massive losses that tore through Wall Street but have so far skirted Japan.

Prime Minister Taro Aso said the government would expand a scheme that gives banks access to public funds and also strengthen regulation on the short-selling of shares.

Aso has also said a state body should be used to buy shares from banks, and that limits on bank recapitalizations should be raised, Economics Minister Kaoru Yosano told reporters.

The prime minister also called for extending tax relief on income from stocks and dividends, Yosano said.

On Sunday, Yosano said that a newly announced bank bailout scheme should be increased several-fold to nearly $110 billon.

The measures underscore the difficulties now facing lenders in the world’s No.2 economy, which at first appeared to have avoided the credit crisis, allowing them to invest in overseas rivals.

“The government will have to do something for banks,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments no teletrack payday loans.

“The problem here is that the stock market has fallen, it has nothing to do with derivatives or anything like that. As stocks have dropped, banks are faced with rising paper losses.”

Tokyo’s benchmark Nikkei share average .N225 briefly dropped as low as 7,141 on Monday, its lowest since 1982.

The benchmark has lost about half of its value so far this year — falling by nearly a third this month alone — as a rise in the yen and a weakening outlook for the economy has curbed appetite for Japanese stocks.

The losses, which drove more risk-averse investors away from currencies such as Australian dollar and back into the yen, overshadowed Group of Seven warnings on Monday that the yen’s sharp swings posed a threat to financial and economic stability.

TRADITIONAL JAPAN

Although Japanese banks have had little exposure to the risky credit instruments that crippled Wall Street, investors now fear that lenders’ extensive shareholdings and rising bad-loan costs will unravel profits this year.

Traditionally, Japanese lenders hold large stakes in their corporate clients as a means to cement business ties. The value of those stocks totaled more than $250 billion at the end of March, data from the Japan Bankers Association shows. 

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