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. Last Updated: 07/27/2016

Japan to Buy $16Bln Worth of Bank Stock

TOKYO -- Moving to avert a crisis, the Bank of Japan said Friday it would buy 2 trillion yen ($16 billion) worth of stocks from Japanese banks over the next year, and urged the government to move toward a publicly funded bailout of the nation's troubled banks.

The governor of the Bank of Japan, Masaru Hayami, speaking just after the central bank detailed the unprecedented stock-purchase plan, also warned that the country's banks were precariously low on capital. He called for a stringent inspection of their balance sheets even as he expressed willingness to supply emergency loans to help them write off bad debts.

"The strength of the banks has declined and the market's trust has been damaged," said Hayami, speaking at a hastily convened press conference. "If there is a threat of crisis we will serve as a lender of last resort."

Hayami's strong words and his announcement that the bank was considering emergency loans reinforced the likelihood that the government would soon use taxpayer funds to bail out Japanese banks -- the third such rescue in four years.

It also provided the clearest indication to date that the government and the central bank were working in concert to clear up the bad loans clogging the Japanese banking system -- a toll as high as $1 trillion.

But that apparent willingness to work together comes at a cost.

Analysts said the Bank of Japan's real motive in initially announcing the stock-purchase plan last month was more political than financial: It wanted to call attention to the threat of a banking crisis in order to shame the government into action.

Efforts to fix Japan's banking problems have been stymied in recent years by bitter squabbling between two powerful institutions -- the Financial Services Agency, which regulates the banking system, and the Bank of Japan, the central bank.

Until recently, the Financial Services Agency maintained that bad loans were a product of the poor economy rather than bad lending practices. It urged the Bank of Japan to pump money through the system to induce people to spend, asserting that this would improve the health of the banks.

But the central bank has argued that the real problem is continued lending by banks to deeply indebted companies with no chance of paying back their loans. This has stranded capital in unproductive ventures while denying new companies the support they need to get going and move Japan forward.

The long stalemate ended late last month, when Koizumi shuffled his Cabinet and dismissed his minister of financial services, Hakuo Yanagisawa. He had presided over the last two bank bailouts and steadfastly insisted that they had solved the problems afflicting the system, even though many banks now have more problem loans than before -- a fact Hayami noted Friday.

The new chief financial regulator appointed by Koizumi, Heizo Takenaka, is expected to face stern resistance from senior bureaucrats within his agency, who remain opposed to a new bailout and continue to argue that the banks are adequately stocked with capital.