Japan bank bailed out

The rescue package could reach 2 trillion yen

News of a multi-billion dollar government bailout for Japan's fifth biggest bank, Resona, has forced share prices lower in Tokyo amid fears of a banking crisis.

The Japanese government announced over the weekend that it would throw Resona a financial lifeline after the bank said its capital had fallen below the legal minimum needed to stay in business.

Resona said losses for 2002 had spiralled to 838bn yen ($7.3bn; £4.5bn) - nearly three times its original estimate - when calculated using stricter accounting rules.

The bailout package, likely to be worth up to 2 trillion yen, will be advanced to Osaka-based Resona when it formally applies to the government for aid.

The situation at Resona is like pumping water into a bucket with a hole in the bottom

Masaaki Kanno, chief Japan economist, JP Morgan

The Resona bailout has prompted renewed concerns about the financial health of Japan's banking sector, which is burdened with hundreds of billions of dollars of bad debts built up during the 1980s and 1990s.

Attempts to put the banks on a firmer financial footing by writing off some of the loans against profits have encountered stiff political resistance, with some officials fearing that such a move could trigger a collapse of the banking system.

The Japanese government moved to allay fears of a banking crisis, saying the Resona rescue package would shore up the system.

"This is not what we will call a crisis," a spokesman said. "This is a move to avoid a crisis."

Markets slide

Some analysts were concerned that Japan's four biggest banks could also require government help to stay afloat if their finances were subjected to the same scrutiny as Resona's.

"The situation at Resona is like pumping water into a bucket with a hole in the bottom," said Masaaki Kanno, chief Japan economist at JP Morgan.

"It's only a matter of time before the nation's big four banks will face similar problems."

Others were more sanguine, saying there was little evidence that the major Japanese banks were in danger of falling below the minimum capital requirement.

But the Resona bailout put Japan's stock market under pressure on Monday, with the benchmark Nikkei share index closing 1% lower at 8,039. The Nikkei had earlier dipped below the key 8,000 level, touching its lowest point for more than two weeks.

Shares in Resona bank closed more than 17% lower, dragging other banking stocks down in turn.