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Japan's central bank said Tuesday it will buy Y1 trillion worth of stocks held by local banks to stabilize the rickety financial sector by stripping balance sheets of some of the equities that have plunged in price amid the global financial crisis.

The initiative, which resumes an emergency move the BOJ made to fight a banking sector crisis several years ago, comes after major banks have reported deep losses on their equity holdings, threatening to undercut their ability to lend.

It also highlights the central bank's determination to support an economy that is sinking deep into recession as Japanese exporters hit hard by the global economic downturn lay off workers and slash production.

The size of the planned share purchase, however, appears to be far smaller than the total value of stocks on banks' books, raising concern that the initiative may not be enough to sever the link between Japan's volatile stock market and the health of the financial system.

The BOJ said in a statement it will buy shares of companies rated BBB- or higher from financial institutions whose shareholdings total at least Y500 billion, or account for more than 50% of their accounting capital. It said it will purchase shares until April 2010, although it isn't clear when the operation will start.

BOJ Gov. Masaaki Shirakawa termed the measure a "safety valve" to ensure stability in the financial system.

"Volatility in stocks held by financial institutions (may raise) the risks to the overall financial system in Japan," and the share buying plan is meant to reduce such risks, Shirakawa said at a press conference.

Analysts said the news could bolster market sentiment but wouldn't do much to shift the course of Japan's sinking economy any time soon.

"Obviously it's positive news in the short-term for the equity market, but in the long run it may not be enough to change the macro environment for Japan," said Royal Bank of Scotland strategist Tatsuo Ichikawa.

In the currency market, the dollar rose nearly half a yen to around Y89.90 in reaction to the news on expectations the move would reduce risk aversion by making banks' balance sheets healthier. But the U.S. currency later softened and at 0916 GMT traded at Y89.10.

The stock market initially surged in response to the news, with bank shares leading the charge, but worries about Japan's economic outlook and dismal corporate earnings later snuffed out the rally.

The Nikkei 225 Stock Average closed down 0.6% at 7825.51, coming off an intraday high of 8084.41. Japan's largest bank, Mitsubishi UFJ Financial Group Inc. (8306.TO), lost 0.8% to Y481 after hitting Y512, while Sumitomo Mitsui Financial Group Inc. (8316.TO) gained 0.6% to Y3,510, off an earlier high of Y3,770.

"Although the BOJ's stock buying is not a major surprise, a specific measure to support the sector is still positive," said Yumi Nishimura, market analyst at Daiwa Securities SMBC.

Shirakawa said late last year the BOJ would consider resuming the buying of bank-held shares.

 
   Weak Stocks Hurting Banks 
 

Japan's economy is in a dire state, and leading indicators such as machinery orders point to even more weakness ahead. In December, industrial production fell at a record pace of 9.6% from the previous month, while the jobless rate jumped half a percentage point to 4.4%, the fastest rate of increase since March 1967.

The stock market has shriveled with Japan's slump, dragging the Nikkei 225 down by about 12% so far this year, after the benchmark index lost 42% in 2008.

Japan's downturn has taken a heavy toll on Japan's banks. For example, Mizuho Financial Group Inc. (8411.TO), the nation's second largest banking group by assets, on Friday posted a group net loss of Y50.55 billion in the nine months ended Dec. 31 due to inflated credit costs and a massive Y243.8 billion valuation loss from its stock holdings.

The planned Y1 trillion budget to purchase bank-held shares is but a drop in the bucket.

Mitsubishi UFJ Financial Group had equity holdings of about over Y4 trillion as of the end of September. Mizuho Financial's securities holdings stood at about Y3.86 trillion and Sumitomo Mitsui Financial Group's were worth about Y2.78 trillion. Those figures are from the banks' disclosed documents.

Some analysts question whether the banks will sell many shares to the BOJ in any case, because they don't want to suffer trading losses after the steep fall in value of the shares, and also because they want to maintain ties with the companies whose shares they own.

Tokyo Stock Exchange President Atsushi Saito said last week that major banks, many of which have had to raise additional capital to make up for valuation losses on securities, should reduce their holdings of securities holdings to lower their exposure to stock market volatility.

"If Japan's major banks didn't have stock holdings, they could have reported better earnings" for the April-December period, Saito said. "Stock holdings can provide them with gains if stock prices rise, but I basically don't agree with the idea of banks having so much equity."

The Japanese government has scrambled to shore up the economy, compiling Y75-trillion worth of stimulus measures since the end of August. Tokyo also announced in December that it would enable a government body to buy as much as Y20 trillion worth of stocks held by banks.

The BOJ has also been on the offensive, taking steps such as buying commercial paper from the market to help companies' fund-raising and complement its monetary loosening. It lowered its policy interest rate to 0.1% from 0.3% in December.

The BOJ last bought shares from banks between November 2002 through September 2004 to fight a banking sector crisis.

-By Tomoyuki Tachikawa, Dow Jones Newswires; 813-5255-2929; tomoyuki.tachikawa@dowjones.com

(Michael Arnold, Juro Osawa, Ayai Tomisawa and Atsuko Fukase contributed to this article.)

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