Japan promises share buy-back

Speculation is rife that Prime Minister Yoshiro Mori will resign.

The Japanese government has announced that it will set up a private-sector investment fund to buy cross-shareholdings held by Japanese banks.

The plan to buy up shares is yet another attempt by the Tokyo government to reform the country's ailing banking sector and help boost the economy.

Burdened with bad debt - a hangover from a speculative property bubble that burst as long as 10 years ago - Japan's banks have tried to cover their losses by selling their extensive shareholdings.

This, in turn, has depressed the stockmarkets. On Friday, Tokyo's key stockmarket index, the Nikkei, hit its lowest level in fifteen-and-a-half years.

The economic crisis, meanwhile, is still overshadowed by speculation that Prime Minister Yoshiro Mori will announce his resignation shortly.

Rescue doubts

The rescue package was controversial, and much doubt remains about whether it will ever be carried through.

In addition to the share buy-back, the plan also envisages tax breaks and an appeal to the Bank of Japan to cut interest rates yet again. In February, the bank cut its headline rate to just 0.15%.

Economists were split over whether the proposals made any sense. Darrel Whitten of investment group ABN Amro, called the plan a "very shallow attempt" to improve the banking sector.

Others, though, called the plan "radical". Ron Bevacqua of Commerz Securities said: "At the very least it represents an enormous break with the past and may signal that some of the structural problems will be addressed."

If Mr Mori resigns, as the BBC correspondent in Tokyo predicts, the coalition parties will be keen to replace him before elections to the upper house of parliament in July.

In the meantime, the political uncertainty keeps depressing the markets.

Run on the currency

The rescue package was announced a day after Finance Minister Kiichi Miyazawa warned that the country's finances could be close to collapse.

I meant to say that Japan will face a hard time reforming its fiscal situation

Kiichi Miyazawa
Japan's finance minister

Correspondents say the country's economic problems are being compounded by political uncertainty over the future of the Prime Minister, Yoshiro Mori, who has little public support.

On Friday, Mr Miyazawa apologised for his remarks, which sparked a run on the yen.

"I apologise for my inappropriate choice of words to describe current fiscal conditions," he told reporters on Friday.

"I meant to say that Japan will face a hard time reforming its fiscal situation."

His comments had driven the yen to a 19-month low against the dollar.

Debt problem

All this comes at a time when the government has been expressing cautious optimism about the state of its economy.

Kiichi Miyazawa: "We have to create a healthy economy"

It has said Japan needs to achieve a sustainable recovery before tackling its mounting debt.

Much of the debt has been accumulated through government spending programmes aimed at stimulating recovery.

Production statistics

Japan is also due to announce gross domestic product figures on Monday, which are expected to show the economy narrowly escaped recession in October-December.

The previous quarter showed a contraction of 0.6% and two successive quarters of negative growth constitutes a recession.

Last month the US ratings agency Standard & Poor's downgraded Japan's credit worthiness, citing the government's lack of progress in carrying out structural reform.