//// TOKYO - Prime Minister Junichiro Koizumi came under pressure on Monday to live up to vows of tough reform as his government fine tuned a policy package due this week aimed at fixing banks and halting years of wealth-destroying deflation. Japan's financial system, beset by at least $415 billion in non-performing bank loans and a fragile stock market, was in severe shape, Bank of Japan Governor Hayami said in a speech, urging comprehensive action to resolve the problem.
Politicians and economists urged the government to match promises of harsh-sounding reforms with measures to the stimulate the economy, protect workers and prevent another recession.
But many doubt Koizumi's chief economic adviser and bank regulator, Heizo Takenaka, would take the radically tough stance feared only two weeks ago in financial markets when investors drove Tokyo's Nikkei share average to 19-year lows.
A task force led by Takenaka is expected to publish a report on action plans to tackle banking problems on Tuesday, and the government is expected to launch a policy package later in the week, incorporating ideas in that report.
"If we don't get a truly coherent policy package -- if we only have the bad-loan steps, even if they are not as radical as a lot of people had feared -- it could just feed worries about deflation rather than fight deflation," said Mamoru Yamazaki, chief economist at Barclays Capital (Japan).
"It's an issue of how they package the policy steps -- those on non-performing loans and real counter-deflation measures. From a stock-market perspective, Japanese share prices will be unable to start a self-sustaining rally and stay dependent on a U.S. recovery if we don't get a convincing package."
Broker Salomon Smith Barney fired a warning shot to Takenaka's team on Monday, cutting Japanese equities in its global portfolio to "underweight" from "overweight" and citing lack of coherent government policy as one reason, along with Tokyo's stronger performance compared to a battered Wall Street.
"Japan has outperformed by 13 percent in dollars since the beginning of the year and with the deterioration in the policy background...the short-term outlook doesn't look great," Alexander Kinmont, equity strategist at Nikko Salomon Smith Barney in Tokyo, told .