Surge on Tokyo market continues

THE JAPANESE stock market continued to surge yesterday as investors reacted favourably to the announcement earlier in the week by the Ministry of Finance that it was planning a fund to help bail out banks immersed in bad debts.

But market analysts warned that the ministry's plan was still only on the drawing board and that the underlying problems in the Japanese economy could cause shares to resume their downward slide.

The Nikkei 225 stock average closed at 16,216 yesterday, 949 points up on the day and nearly 2,000 points above its level on Tuesday, when a plunge to 14,309 prompted Tsutomu Hata, the Finance Minister, to call a hasty press conference to announce the plans to halt the decline.

'Mr Hata's intervention does seem to have been the turning point,' Mathew Berlow, an economist for Credit Lyonnais in Tokyo, said. 'The Ministry of Finance has finally realised that (banks' bad debts) are a serious problem. A consensus has now formed that something drastic is needed to prevent things getting worse.'

The core of Mr Hata's plan is a proposal for banks and insurance firms to set up a company to buy property held by the banks as collateral for bad debts. Some of this property would then be sold on to the government and local authorities for use in public works. Much of this property is no longer worth as much as the original loans it was intended to secure.

For months, Mr Hata has been refusing to acknowledge the problems of bad debts held by banks. His attempts to reassure the market have had the opposite effect, and many investors have become panicky about the overall health of Japan's financial system. These fears in turn have contributed to the fall in stock prices.

But on Tuesday Mr Hata acknowledged that Japan's financial system faced its biggest threat since the Second World War, and it was precisely this frankness that buoyed the market in the following three days' trading.

However, the actual mechanism for buying the property has still not been decided. And although Yasushi Mieno, the governor of the Bank of Japan, gave his support to Mr Hata's plan on Wednesday, he stopped short of promising to provide low-interest loans from the central bank to commercial banks for the proposed property purchases.

The Ministry of Finance is also trying to persuade the banks to increase lending to businesses that are finding it increasingly hard to raise money as the banks batten down their hatches.