Japan's ruling Liberal Democratic party should be able today to pass legislation aimed at recapitalising weak but viable banks after last night forging a surprise agreement with two minor opposition parties.
The unexpected decision by the Liberal party and the Buddhist Heiwa Kaikaku bloc to back the bill in the upper house of the parliament is a breakthrough for the LDP. The government, which does not have a majority in the upper house, can now bypass the Democratic party, the largest opposition party, and the Social Democratic party, which had refused to back its legislation.
The size of the rescue package remains unclear. It is uncertain whether the bill will include a Y67,000 billion ($577 billion) package to support the banks, as proposed by the Democratic party yesterday. The LDP had appeared poised to accept that plan, which included Y30,000 billion to recapitalise weak but solvent banks, Y20,000 billion to nationalise the least strong and Y17,000 billion to protect depositors.
News of the Democratic party's scheme, which would represent one-ninth of Japan's annual gross domestic product, boosted bank shares by 8 per cent yesterday and the benchmark Nikkei 225 index by more than 5 per cent.
It also helped spur sharp gains in European markets and a 1.29 per cent rise in the Dow Jones Index last night, which rose by 101.95 points to 8,001.47.
While Mr Keizo Obuchi, the Japanese prime minister, said last night the bill would provide "quite a lot of money", he failed to spell out how much. "If this bill is enacted, it will send a strong message internationally that Japan absolutely will not cause any financial panic. This is not a rescue of individual banks, but with this, banks will increase their capital and as a result, increase the stability of the financial system."
Yesterday, the upper house passed legislation permitting the liquidation or nationalisation of insolvent Japanese banks. Afterwards, Long-Term Credit Bank of Japan said it would ask to be nationalised before October 23rd - the first to take such a step to avoid bankruptcy.
In Tokyo, Sir Leon Brittan, European Union trade commissioner, yesterday said recent meetings with Japanese leaders had shown there was a "new seriousness of purpose" in the government in tackling the issue, leaving the country "on the verge of a breakthrough". A solution to the banking crisis has become more urgent in recent weeks as the full implications of the credit contraction in Japan has become apparent. Financial institutions - many suffering from a shortage of capital - have been cutting credit lines to clients.
This has led to record numbers of corporate bankruptcies and a sharp reduction in investment. Yesterday, data showed that in August there was a year-on-year 28 per cent collapse in machinery orders.
The Bank of Japan's policy board is due to meet today in Tokyo and may take steps to alleviate the crisis by loosening monetary policy. Last month the board agreed to guide the money market rate down from around 0.5 per cent to 0.25 per cent.
In recent days, some officials have indicated that the bank may take additional steps to loosen policy by stepping up its purchases of government or corporate bonds or cutting banks' reserve requirements. After its spectacular plunge last week, the US dollar continued to firm against the yen as well as against European currencies in quiet trading, due particularly to the close of the US market Monday for a holiday. The dollar's strength against the yen also helped boost the greenback against European currencies.
