The Nikkei stock average of 225 leading shares closed at 16,726.57, up 443 points or 2.7 per cent. Since the beginning of the week, stocks have risen by more than 10 per cent, despite the collapse on Monday of Hokkaido Takushoku, Japan's tenth biggest bank.
Investors took heart from hints by ministers that, despite their new willingness to let big banks go under, depositors would be protected by the government - a position which appeared to be echoed yesterday by Ryutaro Hashimoto, the Prime Minister.
"As I've said, we want to hold a meeting with this in mind," he replied, in answer to a question about whether public funds would be made available.
Officials of the Ministry of Finance admitted after the collapse of Hokkaido Takushoku that they expected "one or two more banks to go under". Ominously, the Ministry of Finance yesterday began an "inspection" of Hokkaido Bank, a regional bank based, like Hokkaido Takushoku, on Japan's northernmost island. Hokkaido has owned up to about 200bn yen (pounds 940m) in bad loans, generally judged to be an underestimate.
But in the financial world, there is presently little doubt that the government will step in to rescue depositors at stricken banks - if not the institutions themselves. Among the public, however, the use of tax money to save banks which have gone under due to their own bad lending decision is unpopular. In any case, the government has committed itself to cutting public spending in an effort to cut its own debt of more than 500 trillion.
The government's difficulties were underlined yesterday by the announcement of a new policy package of deregulation measures intended to boost the private sector and stimulate stagnant growth. It contained more than 100 individual measures, ranging from the privatisation of KDD, the country's biggest international phone carrier, to government loans for small business, and a change in stock market rules to allow banks and insurance companies to compete with brokerages.
According to the Economic Planning Agency (EPA), the overall effect of the package on the economy will be 60 trillion yen. Previous injections of government cash, some 60 trillion yen worth between 1992 and 1995, have "resulted in the worst and most critical fiscal conditions among the major economies in the world," said the economic planning minister, Koji Omi. "I am fully convinced that this economic policy package will soon push our economy back on a robust growth path led by more vigorous and dynamic economic activities in the private sector.''
But some of the measures outlined will not take effect until 1999, and the concession on which business had been pinning its hopes of short-term relief - tax cuts - was absent from the package, although a review of corporate tax cuts is promised for December. "The question is whether it can serve as a quick fix for the flagging Japanese economy," said Kosaku Inaba, chairman of the Japan Chamber of Commerce and Industry. "I hope the government will formulate an additional package that includes tax cuts," said Shoji Tsuda, president of the Mitsukoshi department store chain, badly hit by the rise last April in the consumption tax.
Elsewhere in Far East markets, the escalating problems in South Korea dominated the day's events. The key KOSPA stock market index plunged as much as 4 per cent after South Korea's parliament rejected financial reform bills, heightening speculation that the government would seek tens of billions of dollars from the International Monetary Fund. The KOSPA index still finished 2.32 per cent down on the day.
In Hong Kong, a three-day rally in share prices was halted as the Hang Seng index fell 174.57 points to 10,245.18. There was further concern about possible interest rate increases. "Hong Kong interbank rates are up slightly, and that's enough to make people nervous," said James Osborn of ING-Baring Securities (HK).