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The government plans to ask the Bank of Japan to increase purchases of bank-held stocks to combat falling share prices and head off a financial crisis stemming from a possible war in Iraq, and has asked the central bank to ease its credit grip, officials said Wednesday.

The officials said the government may ask the BOJ to expand the 2 trillion yen target of its purchases of bank-held shares and further unwind cross-held shares by financial institutions and weak corporations ahead of March 31 book-closings.

On Wednesday, the BOJ announced that its purchases of bank-held shares totaled 906 billion yen as of Monday. The central bank announced earlier this month that its purchases as of Feb. 28 had totaled 831 billion yen.

The BOJ began buying shares from commercial banks Nov. 29 through a trust bank. The move, decided in September, was intended to ease the impact of market fluctuations on banks’ capital bases.

The government hopes the measure will improve the supply-demand balance of the stock markets. On Tuesday, Japan’s bellwether Nikkei stock average finished at a 20-year low of 7,862.43. On Wednesday, the average regained 80.61 points to close at 7,943.04.

Prime Minister Junichiro Koizumi has repeatedly said he will not allow the latest bout of stock declines to spark a financial crisis in the country.

The government and BOJ will take steps to boost the stock market, he said.

The BOJ Policy Board is set to meet in early April, its first meeting under Toshihiko Fukui, who is expected to become BOJ governor March 20. But the nine-member board is ready to hold an extraordinary meeting even ahead of schedule if necessary, according to BOJ sources.

The BOJ, however, has remained cautious over whether there is room for more purchases, considering the need to maintain the soundness of its assets.

The government is meanwhile considering giving banks another two years to reduce their shareholdings in other businesses and bringing forward public works projects earmarked for the fiscal 2003 budget.

Beginning September 2004, commercial banks will be required to limit the value of their shareholdings in other firms to an amount less than their primary capital. Senior Liberal Democratic Party lawmakers, including policy chief Taro Aso, have been demanding the change be delayed to 2006.

Separately, government and central bank officials met to discuss further easing the BOJ’s credit grip — interest rates are already at or below zero in some instances — and BOJ officials reportedly expressed readiness to keep injecting ample liquidity into the money market.

“We discussed current situations and exchanged opinions on crude oil prices and stock prices,” Vice Finance Minister Masakazu Hayashi told reporters after the meeting at the prime minister’s office.

During the meeting, officials of the Ministry of Economy, Trade and Industry said METI is “not overly concerned” over the possibility of crude oil price surges because Japan and other countries have established a cooperative oil supply framework, one participant said.

Participants also agreed to try to minimize risks to the economy amid escalating tensions centering on Iraq.

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