Thursday, March 15 11:50 AM SGT

Crisis erupts for Japan's embattled banks TOKYO, March 15 (AFP) - The brewing crisis in Japanese banking exploded into the open Thursday after a new alarm over their financial health by ratings agency Fitch IBCA caused the Tokyo stock market to plummet.

The government scrambled to contain the fallout as a free-fall in banking shares drove the Nikkei-225 average down 169.27 points, or 1.4 percent, to close the morning session at 11,674.32.

One of Japan's biggest lenders, Daiwa Bank Ltd., strongly denied rumours on overseas markets that it was close to collapse. The speculation was "groundless" and "lacks basis in fact," a spokesman said.

Hakuo Yanagisawa, state minister for financial affairs, said there were no grounds for alarm after Fitch on Wednesday placed the individual ratings of 19 Japanese banks on negative review.

"It is unreasonable that concerns over Japanese banks' health caused stock sell-offs in Japan and the US," he told a fiscal committee meeting in the upper house of parliament.

"Write offs of non-performing loans by banks will not threaten their capital adequacy ratios," he said.

Senior government officials led by the embattled prime minister, Yoshiro Mori, held a crisis meeting Thursday on measures proposed by the ruling coalition parties to support the stock market and revitalize the economy.

Finance Minister Kiichi Miyazawa agreed to provide financial support for a proposed body to buy the cross-shareholdings of banks and corporations, which is aimed at propping up the market.

Yanagisawa told reporters: "Miyazawa said that if losses appear when financial institutions and corporations invest their cross-shareholdings into the stock purchase body, the finance ministry will take care of the losses via fiscal spending."

Lehman Brothers banking analyst Nozomu Kunishige agreed that Japanese banks could cover their debt writeoffs despite the slump on the Tokyo bourse, which is destroying the unrealised gains on their vast shareholdings.

Despite widespread concerns in the market, "increased latent losses on their stockholdings alone will not directly trigger insolvency," he said.

All of Japan's banks still had capital adequacy ratios of more than 10 percent, he said, over the eight percent required by the Bank for International Settlements for international banking operations.

"It is true, however, that any increase in their latent losses will lower their risk-taking ability, while making it harder for them to raise funds for higher bad loan write-offs," said Kunishige.

"We also cannot rule out the possibility of a run on a bank, depending on the depth of the ongoing deterioration in market and depositor sentiment."

The banks are struggling to reduce mountainous bad loans left by the collapse of Japan's "bubble economy" in the early 1990s, with analysts complaining the process is moving at a glacial pace.

According to their projections in late November, Japan's leading banks planned to write off some one trillion yen (8.3 billion dollars) worth of bad loan in the second half of the fiscal year to March 2001.

Lehman Brothers, however, reckons they actually need to tackle some 6.0 trillion yen in bad debt.

Hiroshi Okuda, president of the Japan Federation of Employers Associations (Nikkeiren), said the onus was on the government.

"According to the circumstances, we need to consider an extra budget to support the economy," said Okuda, who is also chairman of Toyota Motor Corp.

"If banks proceed with their bad loan write-offs, they would fall into the red, driving small- and mid-sized firms to bankruptcy."http://asia.dailynews.yahoo.com/headlines/business/article.html?s=asia/headlines/010315/business/afp/Crisis_erupts_for_Japan_s_embattled_banks.html

-- Carl Jenkins (somewherepress@aol.com), March 15, 2001