Tax break for Japan's banks

Japan's banks saw their shares soar on Tuesday as investors responded to recent signs of a pickup in the economy.

Reports of a massive tax settlement by the Tokyo city government which could boost profits at the banks, long drowning in red ink, also acted as a spur to the markets.

Shares in Mizuho, the biggest bank in the world by assets, were up more than 15% to an all-time high, and its fellow Big Four banks gained between 8% and 13%.

Stronger than expected growth and a slight fall in unemployment levels - reflected in Tuesday's unusually optimistic Bank of Japan monthly report - have stirred hopes of that Japan's moribund economy may be poised for recovery, revitalising banking stocks.

Adding to the euphoria was a government announcement that it will extend its programme of buying chunks of the banks' stock portfolios to support their balance sheets.

The effect was to push the Topix index - a broader measure of market performance than the blue-chip Nikkei 225 - to a 15-month high.

Out of court

Newspaper reports that Tokyo Metropolitan Government was ready to settle a case which could see it return 230bn yen ($2bn; £1.2bn) out of 320bn yen collected in tax from the banks came over the weekend.

Investors rushed to capitalise on the reports on Tuesday, when the markets reopened after an extended holiday weekend.

The city introduced the 3% tax on gross profits in 2000, because - said Tokyo Governor Shintaro Ishihara - the banks were reducing their net gains by artificial write-offs, starving the city of much-needed revenue.

But in January 2003, a court ruled otherwise, and market-watchers have been eagerly awaiting the outcome of a Supreme Court appeal or a settlement.

The city is now reportedly ready to drop the tax to 0.9%.

The Japanese Bankers' Association confirmed that the two sides were close to a deal.

Shakeup

Japan's financial world could be due for a fresh shakeup, though, with the likelihood of a wholesale shakeup within government.

The 82-year-old Finance Minister, Masajuro Shiokawa, is almost certain to step down once an internal party leadership election is over and done with in late September.

And Heizo Takenaka, the non-politician drafted in by Mr Koizumi to tighten up banking reform, could face demotion because of his unpopularity with ruling party politicians who fear his reforms could hurt their backers.

Mr Koizumi, though, wants to keep Mr Takenaka as his economics and financial services minister.

His co-operation in pushing through the reforms was "vital", Mr Koizumi told reporters on Tuesday.