TOKYO, Feb 5: Japan said on Tuesday it would do its best to allay fears of a financial crisis at a meeting of the Group of Seven (G7) industrialized countries by discussing the condition of its debt-laden banking sector.

“The biggest issue for Japan at the meeting will be the disposal of banks’ bad loans,” Finance Minister Masajuro Shiokawa told a news conference.

“Prime Minister (Junichiro) Koizumi has reiterated Japan will take all possible measures to avoid being the origin of a financial crisis,” he said.

G7 finance ministers will meet in Ottowa from Friday.

Japanese banks are under pressure to reduce a mountain of bad loans to safe levels within the next three years as part of a drastic government reform plan to lift the economy from its third recession in a decade.

Aggressive bad debt write-offs, coupled with the pressure of more loans turning sour amid an economic slump and spiralling deflation has raised serious concerns over the sustainability of Japanese banks without public funds.

“The government cannot force a capital injection on the banks unless they collapse,” Shiokawa said.

“The government might have to deal with aggressive disposals of bad loans by banks but the judgment must be made by the banks’ management. I think at this stage banks don’t need a capital injection,” he said.

On Monday, chairman of the Japan Federation of Economic Organizations called for an early injection of funds to offset a crisis.

“Banks should shift more attention to launching new businesses to increase profitability and expand financial activity instead of focusing on enhancing the capital-adequacy ratio and bad-loan disposals,” reasoned Shiokawa.

The finance minister said he was surprised by a sharp drop in Koizumi’s once sky-high public approval rating after the premier sacked his outspoken but hugely popular foreign minister Makiko Tanaka.

Analysts have said Koizumi’s reform agenda would deteriorate in line with his popularity, which has fallen to under 50 per cent from over 70 per cent according to recent polls.

This has pressured Japanese share prices, which are hovering close to levels not seen since the September 11 terrorist attacks.

“I had never thought the level of support would fall so sharply. We should make efforts to restore public confidence in the government by promoting structural reforms as planned,” said Shiokawa.

State Minister for Economic and Fiscal Policy Heizo Takenaka on Tuesday tried to calm market nerves over the possible impact of Koizumi’s drop in popularity.

“I don’t think the Japanese economy is worse than just after the September 11 attacks, with the launch of the extra budget,” he told a separate briefing.

“The majority of people are expecting the economy to recover in the second half of next fiscal year. It is necessary to accelerate structural reform further,” he said.

In an address to parliament Monday, Takenaka forecast growth of 1.5 per cent in the year to March 2005, once the effect of structural reforms are felt.—AFP