JAPAN’S GOVERNMENT could buy shares to prop up the ailing stock market in a desperate attempt to prevent tumbling equity prices from inflicting further pain on its fragile economy.

Finance minister Kaoru Yosano said that he had instructed government officials to look into measures to revive falling stock prices, including a 1960s scheme involving two consortiums that spent ¥400 billion (€3.2 billion) to counter selling pressure over two years.

“It is undesirable for share prices to fall, causing unnecessary consequences,” said Mr Yosano,

“I discussed with government staff . . . what we could do generally to deal with share prices. We must consider this, keeping an eye on market moves.”

Mr Yosano added that such measures could include setting up a government body to buy shares in the market.

His comments came as Japanese share prices continued to plunge yesterday, threatening to erode banks’ capital and damage their ability to lend to cash-strapped businesses.

The broadly-based Topix index closed at its lowest level in 26 years, at 730.28, while the benchmark Nikkei average also came close to a 26-year low before closing down 1½ per cent, or 107.60, at 7,268.56.

Japan suffered a 3.3 per cent drop in gross domestic product in the last three months of last year and is expected to record a similar fall this quarter.

Exports, the lifeblood of the economy, fell by a record 35 per cent year-on-year in December, and further pain is expected today when the January figures are published.

With an election due by September and the five-month-old government of prime minister Taro Aso languishing in the opinion polls, policymakers are casting around for fresh measures to stimulate the economy.

Senior members of the ruling Liberal Democratic party are pressing for a new stimulus package worth up to ¥30,000 billion to be introduced quickly, even though an earlier stimulus package including cash handouts totalling ¥2,000 billion has yet to be approved by parliament, in which the opposition controls the upper house.

The Bank of Japan has cut interest rates to 0.1 per cent and offered to buy up to ¥1,000 billion of shares held by banks, while the government has suggested that it will allow the purchase by a state body of up to ¥20,000 billion in shares held by banks.

The idea of a broader programme of government share buying to support the market was backed on Monday night by Fujio Mitarai, chairman of the influential Keidanren business lobby. – ( Financial Timesservice)