Japan unveils steps to support financial markets

After an extraordinary policy-setting meeting on Tuesday evening, the Bank of Japan announced a range of steps to improve money market operations in the wake of the recent global financial market turmoil.

The BOJ said it would broaden the range of asset-backed commercial paper eligible for its market operations until the end of April 2009, while it kept its key overnight call rate target unchanged at 0.5 percent.

Tokyo's Nikkei share average surged more than 14 percent on Tuesday, the biggest one-day gain in its 58-year history though far short of last week's 24 percent loss.

Among the steps the government announced before the stock market opened was a possible injection of public funds into regional banks that it said would be aimed at enhancing smooth financing for smaller firms facing a possible credit crunch.

Finance Minister Shoichi Nakagawa said in a statement that Japan's financial system was relatively stable.

But he added: "I will continue to monitor on a heightened alert the impact of the recent rapid fall in the stock markets on Japan's financial sector and real economy."

In a sign the global crisis was taking a toll, Japanese consumer confidence fell to a fresh record low in September from three months earlier on a seasonally adjusted basis, a government survey showed.

Hoping to show the ruling bloc's economic policy prowess ahead of an election that must be held by next September, the No.2 executive in Prime Minister Taro Aso's Liberal Democratic Party said his coalition wanted to enact a second extra budget by the end of the fiscal year next March.

A supplementary budget to fund a 1.8 trillion yen ($17.54 billion) economic package, crafted before the financial crisis, is already expected to be passed by parliament as early as this week.

Big tsunami, little tsunami

"A big tsunami is hitting the American continent and then Europe. After that, it may hit Japan and Asia," LDP Secretary-General Hiroyuki Hosoda told a news conference.

"The size of the tsunami may be one-tenth of what it was in the United States or Europe as Japanese banks have not taken many risks since the bursting of the bubble economy," he said, referring to Japan's late 1980s asset price bubble.

In a nod to concerns over Japan's bulging public debt, Aso told a parliamentary panel the government should not issue new deficit-covering bonds to fund a second extra budget.

Finance Minister Nakagawa, who also holds the financial services portfolio, said he would meet bank executives on Wednesday to urge them not to scale down lending activities.

He said the government would also consider a temporary freeze on the sale of government-held shares on the secondary market and it expected the Bank of Japan to take similar steps.

The government will also further deregulate share buy-backs by companies, consider expanding disclosure rules on short-selling of shares, and extend a safety net for life insurers beyond April 2009, the minister said.

Economists said the steps were welcome.

"Japan has been saying all along that its banking system is healthier than that of the United States and Europe. But if stock prices fall further, that logic might come under doubt," said Takahide Kiuchi, chief economist at Nomura Securities.

"As such, it's important to take pre-emptive measures such as creating a safety net for regional banks, and the government did just that. It's good the government is preparing for a worst-case scenario," he said.

The Nikkei ended up 14.15 percent, its biggest one-day rise in 58 years of trade. Investors took heart from the huge gains on Wall Street and in Europe after pledges of more than 1 trillion euros ($1.36 trillion) by the governments of Britain, Germany, France and other European countries to bolster their nations' banks.

The U.S. Treasury was expected to detail its own capital injection plans later on Tuesday.

Still, caution lingered.

"There's relief that banks probably won't go bankrupt thanks to money injection plans, but after some rebound we will inevitably enter a phase where people will think about how that will actually impact the global economy," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.