JAPAN'S central bank chief said yesterday that the global market turmoil won't destabilize Japan's financial system and praised the Federal Reserve's US$85 billion bailout of troubled US insurer American International Group Inc.
The Fed's rescue of AIG was the "right decision" and would help restore investor confidence after the demise of Wall Street giants Lehman Brothers and Merrill Lynch, Bank of Japan Governor Masaaki Shirakawa said.
Shirakawa acknowledged that Lehman's collapse would hurt Japanese banks, among the US investment firm's biggest creditors. He added, however, that affected institutions should have ample funds to cover losses.
"I am not concerned that the recent events will destabilize the financial system in Japan," he said.
Japan's stock market recovered modestly yesterday as investors reacted to the Fed's rescue of AIG, which was reeling from billions of dollars in souring mortgage debt ?? and appeared to be the next domino to fall.
The Fed said it was acting after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt already delicate markets and the economy.
On Tuesday, Japan's benchmark Nikkei 225 plunged nearly 5 percent to a three-year low on news of Lehman's collapse and Bank of America's takeover of Merrill Lynch.
Japanese financial institutions' Lehman exposure totals 440 billion yen (US$4.15 billion), according to the Kyodo news agency. Among the dozens of banks and insurers whose bottom lines will take a hit are Japan's three biggest: Mizuho Financial Group, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group.
Mizuho reported an overall exposure of 40 billion yen. Its unit Mizuho Trust & Banking downgraded its first-half earnings forecast on Tuesday, citing 11.8 billion yen in Lehman-related losses.
Sumitomo Mitsui said its exposure totals 103.4 billion yen, while Mitsubishi said it has US$275 million outstanding. To ensure liquidity, the Bank of Japan injected 3 trillion yen into money markets yesterday, on top of the 2.5 trillion it pumped in the previous day. The bank noted that the current core inflation rate - about 2.5 percent - is at its highest since the early 1990s.
Shirakawa said that sluggishness will persist for the time being but is likely to "return onto a sustainable growth path with price stability."