The benchmark Nikkei 225 index will likely fluctuate between 13,500 and 14,500, with gains by some lenders such as Bank of Tokyo-Mitsubishi offset by losses by exporters such as Sony and Honda, which depend on a strong US market to bolster profits. The index last week fell 1.19 per cent to 13,983.1 and the benchmark government bond yield rose 1 basis point to 0.675 per cent.
"We're finally moving toward a compromise that will get some kind of safety net in place for the financial system," said Kosaku Inagaki, a manager at Kaisei Securities. "But we keep seeing evidence that economic weakness here is undermining markets in the rest of the world."
Japan's politicians are poised to put the final pieces in place for a plan that could restore Japan's $7.6 trillion banking system to health. If approved, the government would take over the biggest of the country's troubled banks, shut down smaller insolvent lenders and buy up bad loans with public money. The ruling LDP has agreed to the nationalization of Long-Term Credit Bank of Japan, agreeing not to keep it afloat with public money.
Lenders such as Bank of Tokyo-Mitsubishi and Sumitomo Bank may rise on expectations that rapid parliamentary approval of the legislation will bring a modicum of stability to the banking industry as a whole.
"With the government finally taking its first steps toward resolving the banking crisis, it's going to be tough to keep betting against the stronger institutions," said Kunio Hatae, a manager at Tokyo Securities. "Still, banks that are seen as candidates for a takeover may be sold since the rescue plan doesn't call for saving shareholders."
Also likely to limit gains by banks is news that Yahagi, a producer of pig iron and ferro-alloys, declared bankruptcy.
Investors are concerned that the US economy can't remain immune to ills elsewhere, dimming prospects of exporters leading Japan to recovery. "There's no question the global economy is getting caught up in a deflationary cycle," said Tokyo Securities' Hatae.