Japan unveils bank stimulus package

By CNN's Alex Frew McMillan and wire reports

TOKYO, Japan - Japan's much-heralded stimulus package met with a cool response Friday. Investors felt it left too many unanswered questions.

The ruling coalition on Friday unveiled the plan, which was delayed two days by political wrangling.

But Japanese stocks closed almost unchanged. The Nikkei closed up 0.2 percent at 13,383.76, mainly on U.S. tech-stock strength from the day before. The Topix closed down 0.3 percent at 1,313.76.

Bank stocks fell over fears a stock-purchase fund might get delayed or tied up in political wrangling.

The yen, after strengthening yesterday, rapidly lost ground against the U.S. dollar and returned to 125.32 against that currency.

Tackling bank sector

The package aims to tackle Japan's decade-long slump by helping its ailing banks deal with a large amount of bad loans and unwind their stock holdings.

"The economic improvement has stalled and a move for a full recovery led by private demand has slowed," Prime Minister Yoshiro Mori told a meeting of the government and ruling coalition parties called to approve the package.

"Structural problems are behind such weak economic conditions and our priority is to get to the root of those problems," he said.

Mori also confirmed Friday that he would resign.

A skeptical response

The package comes after an embarrassing two-day delay while details were hashed out. There were high hopes that would lead to tougher reforms. But the plan held few surprises and was thin on specifics.

The solution to disagreements that caused the delay, such as over the timing of a fund to help banks unwind their stock holdings, was to leave specifics out.

Economists were skeptical that the plan would have much effect. Past efforts at reform in Japan have lacked teeth and have had little effect.

"Another day, another package," said Richard Jerram, chief Japan economist with ING Barings. "Are we solving the symptoms or are we solving the problem? … I think the answer has to be no."

Muted market reaction

Japanese stocks were boosted Friday by techs, after a rise on Nasdaq. But banks such as Asahi and Sumitomo Mitsui fell 6 percent.

Investors were not enthused. Experts said any good news out of the package had already been priced in.

"I don't see any reason with this package for being more optimistic about the future of the Japanese economy," said Hiromichi Shirakawa, chief economist at UBS Warburg. "There's nothing really effective in the package in terms of accelerating industrial reforms."

He said that near term, the market may drift higher. But long-term prospects are not good because the package lacks meaningful solutions, he said.

"The direction of the stock markets, which have to some extent been supported by wishful thinking, is downhill."

The need for action had become increasingly urgent as Japan's fragile economy has been hit by a slowdown in the U.S. economy and the Nikkei recently plumbed 16-year lows.

But there are concerns about whether the package can be implemented ahead of Japan's elections in July and as Mori steps down.

The policy chief of Japan's dominant Liberal Democratic Party (LDP), Shizuka Kamei, said the package would be implemented regardless of who becomes the next prime minister.

"As long as we follow the policies of the ruling coalition parties, it doesn't matter," he said.

Too many loans not covered

As expected, the package proposed a two-year limit for banks to dispose of existing bad loans. It set a three-year limit for fresh bad loans.

Japan's big banks have $104 billion, or 13 trillion yen, of existing bad loans on their books. But the Financial Services Agency pegs total bad loans at 32 trillion yen.

Shirakawa at UBS Warburg estimates total bad loans are double that, at $511 billion, or 64 trillion yen.

"That leaves 51 trillion yen of bad loans that will not be tackled within this framework," he said.

Economists were also disappointed that the package calls for banks to forgive loans to companies. That keeps essentially bankrupt businesses functioning, dampening the economy.

"In general, [the package] is just more muddle through, and it prolongs taking unpleasant decisions," Jerram said. "One day they're going to have to use a lot of public funds to bail out the banking system. The more they delay this, the more it's going to cost them."

The package also calls for banks to limit their shareholdings to their own capital, from a level of around 135 percent now.

It also establishes a partly state-funded entity to absorb banks' selling of stock. They will have to dispose of around a quarter of the estimated 43 trillion yen of shares they own -- mostly in companies with which they do business.

Reuters contributed to this report.

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