Prime Minister, Keizo Obuchi, and Finance Minister, Kiichi Miyazawa, agreed last week to give top priority to maintaining the stability of the financial system as they seek to reduce the Y77,000bn in bad loans on banks' books.
Investors say that the "soft landing" the administration is advocating really means prolonging the life of terminally ill lenders - and they argue that pulling the plug is the only option if the Japanese economy is to recover.
"The government is just putting off the inevitable," said Yoshio Inamura, manager at Tokyo-Mitsubishi Asset Management. The benchmark Nikkei 225 index was virtually unchanged last week, rising just 0.1 per cent to 16,378.97 points as global financial markets waited to see Japan's new Cabinet line- up, announced on Thursday night.
Gains for bonds are likely to be limited as near-record yields will make investors cautious about buying. Last week, the benchmark government bond yield fell 8 basis points to 1.250 per cent. The yield fell as low as 1.180 per cent, the lowest since 16 June. Many investors expect the benchmark yield will fall below the all-time low of 1.115 per cent reached in June as the economic situation is worsening. Unemployment in June rose to a post-war high of 4.3 per cent.
Also likely to weigh on sentiment is the battered yen, which fell to a three-week low of 143.68 to the dollar after Mr Miyazawa suggested that the government will not prop it up by selling dollars.
The yen's weakness stems from investors' pessimism about the economy, and further decline may spur selling of shares in steel makers and other industries counting on a recovery in domestic demand. "The world remains to be convinced Mr Obuchi has what it takes to jolt this economy back to life," said Mr Inamura, of Tokyo-Mitsubishi.
Still, stocks could get a lift as the new administration begins its first week of regular press conferences - and use the opportunity to foster optimism. "I think we can expect a talkfest," said Mikio Fujiwara, a manager at Universal Securities. "Mr Obuchi doesn't want to repeat his predecessor's mistake of appearing to give in to the market's demands grudgingly."Reuse content