In a surprise break with market principles, the Bank of Japan said Wednesday that it is considering purchasing stocks held by the nation’s most troubled banks, effectively bolstering their financial standing and stock prices at its own expense.

Up for purchase are stocks in excess of core capital at over 10 major and regional banks, BOJ Gov. Masaru Hayami said in a news conference.

Although nothing concrete has been decided, the BOJ could retain these stocks — worth roughly 7 trillion yen to 8 trillion yen — for as long as 10 years, he said.

The unorthodox move would be the first time in international monetary history that a central bank has become a purchaser of corporate stocks.

Wednesday’s announcement reflects the sense of desperation that has set in as share prices refuse to rise and banks prepare to close their books for midterm earnings reports at the end of the month. If the depressed stock prices are reflected in the banks’ balance sheets, many will come under intense scrutiny.

“Banks’ financial strength has deteriorated markedly, and share price falls are threatening to greatly damage the overall credibility of the banking system,” Hayami said.

Tokyo stocks jumped after Hayami’s announcement Wednesday, cutting a fall of almost 280 points earlier on to leave the the benchmark 225-issue Nikkei stock average down only 71.88 points at 9,472.06. All major banks gained.

The stock-buying program is only a temporary measure, Hayami said.

“This is not a stock price-keeping operation. Nor is it a means to supply more liquidity,” he asserted, repeating that reduction of bad loans was essential for the economy to recover. “We will take necessary measures to prevent any moral hazard.”

Under the Bank of Japan Law, the BOJ cannot purchase stocks or real estate. A revision must be approved by either Prime Minister Junichiro Koizumi or Finance Minister Masajuro Shiokawa.

Shiokawa expressed full support for the BOJ’s proposal during a regular news conference, though he said he was not aware of the details.

“We will lend all-out support for the Bank of Japan and cooperate,” he said.

By purchasing the stocks, the BOJ will also be taking on the risk of potential losses.

“It’s an emergency measure, in which the BOJ weighed the risks of share price tumbles against future risks,” said Akio Makabe, chief economist at Mizuho Research Institute.

The greatest long-term risks are hyperinflation — as the measures will put the credibility of the BOJ and the value of the yen at risk — and a growing dependence on public funds as the economy continues to veer away from established market principles, he said.

Japan’s banks are holding a massive amount of shares issued by their largest borrowers that makes up a sizable portion of their assets. When the stock market sinks, these shares can cause the banks trillions in unrealized losses, especially if the benchmark Nikkei average plunges by 1,000 points.

Banks must subtract a further 60 percent of the unrealized losses from their capital and set aside appraisal costs for stocks whose prices have fallen by 30 percent or more from book value.

The largest 12 banks had 1.2 trillion yen in unrealized losses at the end of March. That could have grown to as much as 4 trillion yen when share prices dipped to a 19-year low earlier this month.

But slumping share prices have prevented banks from selling their stocks, despite regulators’ instructions that they reduce the volume of their shareholdings to within the range of their core capital by September 2004. Selling stocks will lower share prices further and hurt the banks’ finances, they fear.

“Market risk pertaining to banks’ shareholdings has become a significant destabilizing factor,” Hayami said.

Like the finance minister, Financial Services Minister Hakuo Yanagisawa welcomed the BOJ’s proposal after acknowledging that a fall in stock prices poses a problem for the stock-laden banks.

“(The proposal) means that the Bank of Japan lends a hand (to banks) for the disposal (of stocks they hold) from a broad perspective” Yanagisawa told reporters.

Yanagisawa said that the BOJ’s proposals do not conflict the state-run Banks’ Shareholdings Acquisition Corp., which was established to purchase stocks from banks, saying that the organ is designed as a safety net.

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