TOKYO, Oct 11: The Bank of Japan (BoJ) ignored political pressure to ease monetary policy Friday and urged the government to consider pumping more money into ailing banks to help speed up the writing off of their massive bad-loans.

The central bank also announced details of a plan to buy 16 billion dollars of stocks held by banks to help protect their balance sheets as they speed up the disposal of bad loans.

“If it is judged that financial system stability needs to be secured, the injection of public funds should be considered as an option to respond to the situation,” the bank said in a statement after a two-day policy board meeting.

The bank also urged the government to act “pre-emptively” to prevent a financial crisis. Under current law, the government must declare a crisis before it can pump money into the banks.

A comprehensive approach was required to resolve the non-performing loan problem, including a more appropriate evaluation of non-performing loans by banks, the BoJ said. The comment echoed the views of Heizo Takenaka, the country’s economic and fiscal policy minister and chief financial sector regulator.

To deal with the immediate pressures on bank’s balance sheets from the plunging value of their equity portfolios, the central bank said it would spend 2 trillion yen (16.1 billion dollars) by September 2003 to buy stocks held by Japanese banks.

The BoJ will not start selling the shares, which will be bought at market price, until the end of September 2007 and this should be completed by September 2017.

Jesper Koll, chief economist at Merrill Lynch, Japan, dismissed the scheme as inadequate, saying two trillion yen was “nothing.”

“It’s not even one percent of market capitalisation,” which is roughly 350 trillion yen, he said.

“Banks’ cross-shareholding unwinding runs at two percent of market capitalisation (a year), so they’re absorbing slightly less than half (the five trillion yen) of unwinding,” he said.

Earlier the central bank said it had decided to maintain the present monetary settings.

The BoJ’s monetary stance has now remained unchanged since the board’s March 20 meeting, despite mounting calls for it do more to aid the government’s efforts to overcome persistent deflation and restore growth after a decade-long slump.

Before the BoJ meeting ended, Finance Minister Masajuro Shiokawa called for the central bank to lift liquidity in the financial system by raising its current account balance by a fixed amount each month.

“I want the BoJ to lift its efforts to ease its credit stance by increasing liquidity,” Shiokawa told a press briefing.

Richard Jerram, chief economist at ING in Tokyo, said the BoJ’s failure to change ease monetary policy this time round was “no great disappointment.”

“Realistically, at the moment, there’s no material evidence that policy over the bad debt problem has changed.

He said the BoJ would want to see more concrete action by the government before acting itself.

The sense of urgency has grown more acute after the stock market’s benchmark Nikkei-225 index plunged to its lowest level since April 1983 on Thursday.

Following the appointment of reformist Takenaka to head the Financial Services Agency last week, fears have grown that the fallout from an aggressive solution to the banks’ bad debt problem could drive the economy into a downward spiral.—AFP