Japan has moved decisively towards setting up a "bridge bank" designed to take on the bad loans of failing lenders and prevent a series of bankruptcies among leading banks. Meanwhile in a further sign of the difficulties affecting the Asian economies, Hong Kong's chief executive has announced a £3 billion stimulus package to address what he called a "very critical situation. In Japan, the difficulties of the ailing Long Term Credit Bank (LTCB) deepened as its shares plunged a further 44 per cent and speculation intensified that it would be absorbed by other banks, or could become the first customer of the bridge bank.
The urgent need for a solution to Japan's banking crisis was underpinned when the yen resumed its slide on the foreign exchanges, falling four yen to 137.84.
However, despite the uncertainty surrounding the LTCB, one of the nation's leading corporate lenders, the Tokyo stock market seemed convinced that the authorities were finally ready to act on banking reform. The Nikkei index climbed 41.11 points to 15,309.09.
Tokyo's confidence that the government had decided to "bridge bank" followed a summit between two of the most powerful figures in the country - Mr Ryutaro Hashimoto, the Prime Minister, and Mr Koichi Kato, the secretary general of the ruling Liberal Democratic Party.
The two agreed on establishing the bank and a facility to take on the bad loans by July 8, four days before Upper House elections.
The nation's two leading politicians clearly have decided that the uncertainty hanging over the banking system must be resolved to assure voters that the economy will not worsen after the election and prevent the yen weakening further on the foreign exchanges. Every time the yen falls, the capital ratios of the Japanese banking system weakens, pushing it near to insolvency.
Meanwhile in Hong Kong, Mr Tung Chee-hwa, the chief executive, yesterday warned that the territory's economy faced a `very critical` situation.
In his starkest assessment of economic prospects, Mr Tung admitted regional crises and the bursting of an asset-price bubble had pushed Hong Kong into recession. "The effects of the turmoil are more far-reaching than we anticipated," he said. Gross domestic product would probably fall in the three months to June 30, the second consecutive quarterly decline. The pressures facing Hong Kong were underlined by the announcement that Standard & Poor's might cut the territory's foreign currency ratings. The US ratings agency said growing financial sector strains and the risk of an economic downturn could threaten Hong Kong's ability to maintain its prudent fiscal policies.
Mr Tung and his administration rejected concerns that its decision to suspend government land sales, improve liquidity in the financial system and cut taxes signalled a shift from Hong Kong's traditional principles.
In a broadcast to the public, Mr Tung said the territory would stick to its exchange rate link to the US dollar in spite of the cost of high interest rates needed to defend the peg.
