BoJ share buyout plan fails to lift market

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The Bank of Japan unveiled a plan to buy up to Y1,000bn in shares held by banks in a move that reflects growing alarm at the impact of falling stock prices.

The move initially boosted the Nikkei stock average by 200 points before fears about corporate earnings hit sentiment. The index closed moderately down at 7,825.51.

The initiative comes a week after parliament approved funding for the ­government to buy up to Y20,000bn ($225bn, €173bn, £156bn) in stocks held by banks as part of a stimulus package. On the day of the vote, the ministry of economy, trade and industry, with a nod to cash-strapped businesses, had unveiled a Y15,000bn plan to encourage banks to buy shares by guaranteeing most of the value of such investments.

Masaaki Shirakawa, BoJ governor, said that bank shareholdings constituted “a problem for Japan’s entire financial system”.

“If you look at what kind of risks big Japanese banks have now, the biggest risk is not credit risk – it is volatility in share prices,” he said.

By buying shares from the banks, the central bank aimed to provide a “safety valve” that would help ­stabilise the financial system, Mr Shirakawa said.

His comments highlight concerns that the plunging value of bank shareholdings is limiting their ability to lend to business.

The central bank’s move is the latest in a growing list of initiatives designed to ease the flow of credit and avert a rush of bankruptcy filings before the fiscal year end on March 31.

Analysts were sceptical about the likely impact of the share initiative.

“It won’t have any effect because in this declining market it is questionable whether banks will want to sell their shareholdings,” said Hironori Nozaki, banking analyst at Nikko Citigroup in Tokyo.

Japanese banks have traditionally held shares in their main customers in a practice designed to cement their relationships.

The BoJ said it would buy shares of companies with a credit rating of at least triple B minus at market prices. The purchases will continue until the end of April 2010 and the BoJ will not begin selling shares for another two years, with an eye toward closing out its holdings by April 2017.

As the stock market has plummeted, banks have had to write down the value of their shareholdings, resulting in huge losses.

Mitsubishi UFJ Financial Group, Japan’s biggest bank, expects to post a Y288bn securities appraisal loss in the third quarter alone.

According to Akira Takai, at Daiwa Research Institute, Japan’s seven largest banks probably suffered stock valuation losses of Y958.3bn in the nine months to December, wiping out the bulk of their core profits.

Commenting on the share plan, one asset manager said: “The rest of the world got blown out of the water by subprime. Japan got blown out of the water by equities.”

The Japanese government and the BoJ launched ­programmes to buy shareholdings held by banks early in the decade during Japan’s last banking crisis, but ­suspended the purchases about five years ago.

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