Tokyo, March 10 (Bloomberg) -- Japan may be forced to buy stocks after the Nikkei 225 Stock Average's plunge to a 20-year low threatened to erode the capital that banks and insurance companies need to stay in business, investors said. The government may use public pension money to buy stocks, and the central bank may expand its plan to buy 2 trillion yen ($17 billion) of shares from banks to limit their investment losses when they close their books at the March 31 fiscal year- end, investors said. The Nikkei's slump, which brought it below 8000 points for the first time since 1983, will dent confidence at a time when Prime Minister Junichiro Koizumi's party faces local elections in April. It also comes as banks, burdened with more than 52.4 trillion yen in bad loans, get ready to report earnings under stricter accounting rules.
``The Koizumi cabinet will have a very strong reason to support the market and also to avoid a financial crisis,'' said Hitoshi Yamamoto, who manages about $1 billion in Japanese equities as the president at Commerz International Management (Japan) Ltd. ``This is terribly bad news for the government.'' The Nikkei slumped 101.86, or 1.3 percent, to 8042.26 as of the 3 p.m. close of trading in Tokyo. Earlier, the average fell below 8000 for the first time since March 9, 1983, dropping to as low as 7975.36. ``The government and the Bank of Japan need to think of an effective policy'' to help stock prices, Chief Cabinet Secretary Yasuo Fukuda said at a daily briefing. He said he expects the bank to take ``appropriate monetary actions if necessary.''
Pension Funds
The government may also ask the central bank to buy exchange- traded funds -- index-based investment products that allow investors to buy or sell shares of entire portfolios of stock in a single security, investors said. ``Further weakness will most likely result in a government statement of support and if that doesn't help, a price-keeping operation by the month-end,'' said Basil Masters, chief investment officer at Credit Agricole Asset Management Japan Ltd., which handles $1 billion in Japanese stocks. In February last year, the government set limits on trades that profit from falling share prices to shore up the stock market before the end of the fiscal year. It also told pension funds to buy stocks, according to some investors. Falling share prices are increasing losses on stockholdings at banks, threatening to reduce their capital below the 8 percent of risk-weighted assets recommended by the Bank for International Settlements. The nation's four biggest banks announced plans to raise 2 trillion yen to avoid a state bailout.
Stock Losses
``Given recent efforts to boost their capital, it's unlikely that banks will fall below the BIS ratio, triggering a financial crisis before the fiscal year-end,'' said Hiroshi Motoki, who helps manage $387 billion in assets worldwide at Alliance Capital Management Ltd. ``But it's not like we've completely avoided a financial meltdown.'' Sumitomo Mitsui Financial Group Inc. and its six biggest rivals had a combined 5.8 trillion yen in unrealized losses on their stockholdings as of March 7, up 51 percent from Sept. 30, according to Daiwa Institute of Research. Mizuho Holdings Inc., the world's biggest bank by assets, expects to post a 1.95 trillion yen group net loss for the year ending March 31 -- the largest ever for a Japanese company -- because of bad loans, the costs of an accelerated job-cut plan and stock-market losses.
`Drastic Measures'
Financial Services Minister Heizo Takenaka yesterday called on the Bank of Japan to take ``drastic measures'' to inject more cash into the economy, although he said it was up to the central bank to decide how. Six of the top seven life insurers would post losses with the Nikkei average at its current level, according to company reports. Nippon Life, the largest, will face losses if the index sinks below 7,900. Central Bank Governor Masaru Hayami last year announced a plan to buy shares from banks to limit their stock losses. The central bank began to buy shares from lenders in November and plans to buy as much as 2 trillion yen though September. The bank bought 831 billion yen of shares as of Feb. 28. Hayami's five-year term ends on March 19. He will be replaced by Toshihiko Fukui, a former deputy governor of the central bank. Investors said Fukui isn't likely to set a new policy direction in the early weeks of his term.
The central bank may inject extra cash into the economy by temporarily raising the upper limit of its target for reserves it makes available to lenders from 20 trillion yen, said Yasuo Goto, a senior economist at Mitsubishi Research Institute and a former central bank official. Even so, ``the central bank probably won't take action unless the risk of financial crisis becomes imminent and spreads to other markets beyond stock markets,'' Goto said. Some legislators of the ruling Liberal Democratic Party are urging the central bank to increase planned share purchase. Hayami last month said he saw no need to increase the amount now. //www.quote.bloomberg.com