The government and the ruling coalition failed to settle the details of an emergency economic package Wednesday, remaining divided over how soon to set up a controversial share-purchasing body.

The two sides will try to finalize the package Friday, Taro Aso, state minister in charge of economic and fiscal policy, told a news conference.

In a closely watched meeting Wednesday, however, policymakers from the government and the three ruling parties — the Liberal Democratic Party, New Komeito and the New Conservative Party — managed to agree on the need for a basic framework for the stock-buying institution, he said.

As a pillar of the economic package, the proposed body would be charged with purchasing cross-shareholdings from banks, mainly to prevent their financial muscle from being dented by stock price fluctuations.

They agreed that the life span of the body would be limited to five years and required to complete the purchase of shares from banks within three years.

The organ would be partly funded by the government and be able to utilize the Bank of Japan’s special loans if it has insufficient funds to purchase shares.

They also agreed to limit banks’ shareholding to amounts under the value of their capital, thereby forcing banks to insulate their balance sheets from price volatility on the stock market.

Aso said there was heated debate over the timing of the creation of the new body between top LDP policymaker Shizuka Kamei, who called for it to be established quickly, and Financial Services Minister Hakuo Yanagisawa, who pointed to technical problems such as the need to amend the Banking Law to enable banks’ shareholdings to be limited.

Kamei, with an eye on the Upper House election in July, pressed for the measures to be enacted within the current Diet session, while Yanagisawa proposed creating it during an extraordinary Diet session in September.

Regarding the final disposal of banks’ bad loans, the government and the ruling bloc agreed to allow just two years for major banks to dispose of their existing loans to failed firms and those likely to go under. Major banks should also complete writeoffs of newly emerging problem loans within three years.

The final disposal of bad loans is designed to remove the loans from banks’ balance sheets either by debt waivers or cutting off loans to failing companies that are unlikely to recover.

With this point in mind, Aso said the final package will incorporate steps to create a safety net for those affected by corporate bankruptcies resulting from banks’ disposal of bad loans. The amount of outstanding bad loans, however, is huge. Japanese banks are believed to hold some 24 trillion yen in loans to borrowers considered to be at risk of failure, to borrowers effectively in a state of collapse and those that are actually bankrupt.

On other points, the government and the ruling coalition agreed to establish a task force, headed by the prime minister, to design urban revitalization projects.

Regarding tax measures related to stock and real estate transactions, Aso said these issues would be included in the package but would also be reviewed by the LDP’s Tax System Research Commission, which will convene soon after the compilation of the package.

Although the LDP tax panel usually aims to complete its annual draft of tax proposals by December, the deliberations have been moved forward to April so the tax reforms can be completed sooner, possibly around April 20.

Experts not surprised

Wednesday’s postponement of the government’s much-awaited economic package reveals the policy differences between the government and the three ruling parties.

Some analysts and dealers said they were not surprised by the decision to delay the adoption of the package until Friday and, given this relatively calm reaction, the negative impact will probably be limited.

Debate concerning the disposal of bad loans by banks and the creation of a stock-buying entity to purchase their cross-held shares had been inadequate, said Masatoshi Sato, manager of the equity investment information group research division at Mizuho Investors Securities Co.

“(Banks’ bad debts and vulnerability to share price fluctuations) are fundamental problems that have been postponed for years,” he said. “No plan to solve these problems is going to come from a month of discussion, following share price falls and foreign pressure. The plan, at this point, is still full of holes.”

The ruling coalition has yet to state the magnitude of the deflationary pressure it expects from speeding up the banks’ writeoffs, Sato said. It has also failed to explain who will ultimately buy the shares put up by the stock-buying entity.

Sato questions whether banks will select shares that will be attractive to the market for absorption by the entity, ultimately leaving the burden on taxpayers. He also expressed concern that the body may become a moral hazard if banks view it as a mere dumping ground for unwanted securities.

Others, however, contend that the entity may spur improved corporate performance.

“The sale of bank-held company shares (to more demanding shareholders) will result in heightened corporate governance,” said Gary Evans, a strategist at HSBC Securities.

For the April-September period, banks will be required for the first time to include 60 percent of latent losses on their debt securities in their interim reports.

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