Japan struggles to control volatile economy

Japanese investors keep an eye on the market

TOKYO, Japan -- It was yo-yo city for the Japanese stock market as the beleaguered government of Prime Minister Yoshiro Mori struggled to prove it is in control of the economy.

While the Nikkei was saved from another 16-year low, analysts do not believe the Japanese market is out of the woods.

First, investors were spooked by news overnight that the ratings agency Fitch had placed 19 Japanese banks under negative review. It cited growing concerns over falling share prices and the asset quality of Japanese banks.

That, combined with the U.S. market drop, sent the benchmark Nikkei plunging more than three percent, taking much of Asia with it.

But the Nikkei bounced back up again when the Prime Minister made it clear that his government plans to take emergency measures to revitalize the banking sector.

By the end of trading, the Nikkei was up 2.61 percent from the 16-year low it hit on Wednesday.

Revitalizing measures

At a special cabinet-level task force meeting to seek ways to prop up the stock market, Prime Minister Yoshiro Mori warned that the economy has stalled, and that the outlook is troubling.

Mori warns of a stalled economy

He urged his ministers to tackle the problem of bad loans plaguing Japanese banks, which have been further crippled because they hold a large amount of stock from companies they do business with, and the value of that stock has plummeted.

Finance minister Kiichi Miyazawa told a parliamentary session that "Japan's overall economy is in a slight recovery trend but the situation is still tough."

He offered a ray of hope when he said the government would be willing to provide fiscal guarantees for a bank bailout scheme proposed last week, under which a private fund would be set up to buy up non-performing stocks away from Japan's beleaguered banks.

That would help to keep the value of their assets from dropping further with the stock market, contributing to the downward spiral.

All eyes are now on the Bank of Japan, whose governor, Masaru Hayami, hinted that Japan's central bank would consider the government's request to support its bail-out plan by lowering interest rates.

"We will try to make it happen and take responsibility for that, within regulations," he said.

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