Japan economic plan gets short shrift

The Japanese government's keenly-awaited plan to tackle deflation has been dismissed as "clearly insufficient" by the ruling Liberal Democratic Party's top policy researcher.

The government said it would stabilise the financial system and was willing, if necessary, to inject extra capital into the banking system.

But the document offered little in the way of firm detail and served more to confirm that no big steps were being contemplated before April.

They are just leaving options open and making no decisions until they are backed into a corner

Ryo Hino, analyst at JP Morgan

Taro Aso, head of the LDP's Policy Research Council, described it as an ineffective stop-gap.

"I can understand it as 'measures for the time being', but it is clearly insufficient if you ask whether it is a fully fledged initiative to tackle deflation", Mr Aso said.

Moves to bolster share prices were more successful, however, and Tokyo's Nikkei stock market index closed at a seven-week high.

'No quick fix'

The government issued the blueprint after a day of meetings between Prime Minister Junichiro Koizumi, the main economic policy panel, the central bank governor and three top economy ministers.

Mr Koizumi and economy minister Takenaka are midly optimistic

"This is a long-term battle. It's not a quick fix," the Japanese prime Minster had said earlier in the day.

After years of lacklustre performance, the world's second biggest economy is now mired in recession and spiralling deflation, burdened with huge debts and a banking system that some analysts view as technically insolvent from propping up loss-making firms.

The blueprint focused on two issues: supporting the stock market and tackling bad debt at the banks.

Few concrete proposals

Analysts were sceptical about the value of the package.

"It's window dressing," said Ryo Hino, an analyst at JP Morgan in Tokyo. "They are just leaving options open and making no decisions until they are backed into a corner."

Many international observers fear big Japanese banks could go bust and trigger international repercussions if they were to write off loans to loss-making companies.

The document said the state-backed body that buys back non-performing loans from banks would be "more active". Meanwhile, the financial regulator would carry on its review of the sector till 31 March.

Supporting the stock market

To bolster the stock market, it said the Financial Services Agency (FSA) would curb short-selling.

This is the practice of betting on a falling market in which a seller sells shares they do not yet own in the expectation they will be able to buy them back more cheaply later on.

Earlier, the FSA took action against four foreign brokers - Credit Lyonnais, Bear Stearns, Deutsche Securities and Nikko Salomon Smith Barney - for short-selling.

Institutions rushed to correct their positions, pushing the Nikkei up 3.6% to close at 10,573 points, its highest level since 10 January.

Demand for yen for hasty stock buy backs strengthened the currency to 134.56 yen to the dollar, traders said.

Supporting banks

Driving up the stock market is intended to support the banks, said Ken Courtis, vice-chairman of Goldman Sachs Asia.

Japan's banks must write down the value of their portfolios to current market values by the end of the financial year on March 31.

At present, bank portfolios contain many assets - often accepted in lieu of debt repayments - based on giddy valuations from the 1980s.

In addition, Finance Minister Masajuro Shiokawa said the Bank of Japan has been asked to inject more money into the economy at its board meeting on Thursday.

The BOJ has taken such action several times in recent months, with little impact.