The Bank of Japan pledged yesterday to buy $11 billion (Dh40.4bn) 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 is 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 is the reality."
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.
"Moves in the international financial markets were a big factor. The anxiety over the western financial system is rising again. And the end of Japan's financial year is approaching. That is what's determined the timing."
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 ¥1 trillion ($11bn) 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 ¥20trn 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.
Back then, the central bank bought ¥2trn in stocks, twice the amount it has proposed this time around, in a two-year scheme that ran until 2004 to help many commercial banks staggering under a huge pile of bad loans and stock losses.
Slumping stock markets are a global problem for banks. A South Korean regulator reported the country's banks posted its first combined loss in eight years in the final quarter of 2008.
The BoJ's plan is the latest in a string of measures as Japan's economy struggles with recession.