Tokyo market: Markets hang on loan plan

Japanese stocks may fall below the 15,000 mark this week if the government fails to convince investors of its commitment to shaking out the banking industry - and fast. Bonds are likely to be little changed as concern about rising borrowing costs for the banks is offset by a report likely to paint a bleak picture of the economy.

Next Thursday, prime minister Ryutaro Hashimoto has promised to present a draft of his "total plan" for alleviating the 77 trillion yen in bad loans weighing on the country's financial system. If the plan doesn't commit the government to pulling the plug on terminally ill lenders - and to protecting their depositors and shareholders - banks and their largest borrowers may lead the Nikkei index to depths as low as 14,500.

"Foreign investors will have the final verdict," said Shigemi Nonaka, director at Sakura Asset Management. "If they don't buy into the scheme, the yen will take another beating and the market will have to face the prospect of an Asian currency crisis."

The government's dilly-dallying over the bad-loan mess dragged down share prices last week. The Nikkei fell 0.37 per cent to 15,210.04. Investors were unenthusiastic about reports that Long-Term Credit Bank of Japan will merge with Sumitomo after shifting its problem assets to a government- backed "bridge bank". "The last thing the market wants to see is banks getting off the hook without taking responsibility for the policies that got them where they are," said Yoshio Inamura at Bank of Tokyo-Mitsubishi.

Investors say the Bank of Japan's "tankan" quarterly survey of business sentiment, due tomorrow, will be a "psychological drag" on the Nikkei. It will probably show that confidence has deteriorated amid a recession at home and tumbling exports to Asia. "The bad tankan will probably give bonds support because doubts about Japan's stability could diminish" with the merger of LTCB and Sumitomo Trust, said Koji Hozumi, a trader at New Japan Securities.

Others were concerned that a weak tankan could further undermine confidence in Japan's financial system. "I have a mixed feeling about the market because I'm wondering if the bad tankan will support bonds or raise more concern about Japan's credibility," said Takanori Abe, a trader at Mitsui Trust Securities. Last week, the benchmark government bond rose, pushing the yield down three basis points to 1.240 per cent.

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