Japan places banks in state control

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JAPAN YESTERDAY took a key step towards resolving the debt crisis in its banking system when politicians agreed to put the weakest banks - including the troubled Long-Term Credit Bank of Japan (LTCB) - under state control.

Smaller financial institutions could be closed down under proposals agreed by ministers and opposition leaders. Public funds will be used to help banks dispose of at least some of their bad debts, estimated to total 77 trillion yen (pounds 350bn).

Analysts gave the move a cautious welcome as a step in the right direction, but warned that more needed to be done.

Keizo Obuchi, the Japanese Prime Minister, said: "I'm determined Japan won't be the source of a global financial meltdown. Restoring financial stability will quickly lead to a revival of the economy."

Mr Obuchi made key concessions to the opposition in his eagerness to agree concrete proposals in advance of next week's meeting with President Bill Clinton. In particular, he agreed to strip regulatory authority from the Ministry of Finance (MoF). The cosy relationship between the MoF and the banks has been blamed for at least some of Japan's current difficulties.

The plans for bank reform were announced after the Japanese markets closed yesterday. However, the Nikkei finished the day up 123.98 points at 13,983.12 as rumours of an agreement swept the market.

Speculation about the solvency of Japan's banks, including major players such as LTCB, has contributed to recent negative market sentiment.

The yen strengthened to 131 to the dollar immediately after the announcement, up from 131.83 on Thursday night. But the early gains were later reversed on market fears that the plans might not be carried through.

James Montier, equity strategist at BT Alex.Brown, said: "It all seems rather sketchy at the moment. After a number of false starts it's going to take a little bit more than this to win over the markets. Remember that parliament still needs to ratify the plan, and then Japan needs to go through with it."

Avinash Persaud, currency strategist at JP Morgan, said: "In the short term it should help to revive lending, but I think in the long term it is somewhat questionable. Nationalising the banks is not a permanent solution."

Details of the agreement were not released, but politicians in Japan had earlier talked of creating a new government agency to buy up bad loans with public funds.