The Bank of Japan began buying shares held by banks Friday, taking on increased risk in a bid to help banks unwind cross-held shareholdings with borrowers.

Mitsui Trust Holdings Ltd. and a group of unidentified banks asked the BOJ to purchase several billion yen worth of stock by the end of the day, the central bank said.

The purchases are part of the BOJ’s plan to buy up 2 trillion yen worth of commercial banks’ shareholdings by September 2004.

Banks hold large amounts of stock issued by their biggest corporate clients, a legacy of Japan Inc. With cross-shareholding, banks shielded companies from irate stockholders and corporate takeovers and allowed them to carry through with long-term projects.

Those stock holdings have slumped and are one of the major threats to bank capital, resulting in over 2 trillion yen in unrealized portfolio losses in stocks and bonds at the end of September.

The government requires banks to reduce the balance of their shareholdings to a point equal to or lower than their core equity capital by the end of September 2004. The BOJ has offered to buy up shares exceeding this amount.

All of Japan’s major banks have signed up for the stock purchase program, with the exception of Sumitomo Trust & Banking Co., which has already met the government’s shareholdings requirements.

The day before the purchases, BOJ stocks on the Jasdaq over-the-counter market fell to a 16-year low, reflecting concerns over how the purchases might damage the quality of the central bank’s assets.

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