Last week the benchmark Nikkei index seesawed on conflicting views on whether the ruling Liberal Democratic Party will to use public funds to support the banking system.
The Nikkei gained 10.87 per cent on the week to close at 16,721.58, but not before swinging within a 2,000-point range. This week the index should trade between 16,000 and 17,000.
The yield on the benchmark government bond, maturing in September 2005, rose 9.5 basis points to 1.73 per cent and touched 1.8 per cent, the highest since 16 October.
The LDP is scheduled on 10 December to release its plans for a third economic package to help Japan's economy. The party is considering setting up a financial system stabilisation fund to help banks rid themselves of trillions of yen in bad loans, according to a proposal drafted by an LDP committee. However, not everyone within the LDP is wholeheartedly embracing the idea. Finance Minister Hiroshi Mitsuzuka said on Friday that the use of public funds required debate among the public and in parliament before any final decision is reached.
Signs of progress could fuel a continued rise in banking shares, which only a week ago were at their lowest in 13 years. Banks as a group gained 13.2 per cent last week, but have lost 11.6 per cent in the past month, amid concern about in non-performing loans, latent losses in equity holdings, bankruptcies at home and economic turmoil in Asia.
However, talk of an economic stimulus plan had only a minimal impact on bond investors, who anticipate that such a plan would not allow the Bank of Japan to raise interest rates from record lows. Bonds could be hit, though, should the government move to buy preferred shares of troubled banks to shore up their capital. A rescue of the banks would help the economy and ease concerns over the financial system, pushing down bonds.
Japan may also come under pressure to take firm action on the economy from the US at the Asian Pacific Economic Forum in Vancouver next week, which may add to the pressures on the stock market.
The Japanese market is closed tomorrow for a national holiday.
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