Mitsubishi UFJ Financial Group, Japan's biggest bank, said on Monday it will raise up to $10.6 billion by issuing new shares, the latest sign that a free-falling stock market is likely to shred profits at Japanese lenders. News of Mitsubishi UFJ's fundraising came as Tokyo stocks tumbled to their lowest in 26 years, prompting Japan's government to outline steps to ease the strain on banks, which have heavy exposure to domestic equities.
Although Japanese banks have had little exposure to the risky credit instruments that crippled Wall Street, investors now fear that lenders' extensive shareholdings and rising bad-loan costs will unravel their profits this year.
"The government will have to do something for banks," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "The problem here is that the stock market has fallen. It has nothing to do with derivatives or anything like that. As stocks have dropped, banks are faced with rising paper losses."
Investors have dumped Mitsubishi UFJ Financial Group and other major Japanese banks in recent sessions, on concern that their heavy exposure to domestic equities could trigger the kind of massive losses that tore through Wall Street but have so far skirted Japan.
Prime Minister Taro Aso said the government would expand a scheme that gives banks access to public funds and also strengthen regulation on the short-selling of shares. Aso has also said a state body should be used to buy shares from banks, and that limits on bank recapitalisations should be raised, Economics Minister Kaoru Yosano told reporters.
The prime minister also called for extending tax relief on income from stocks and dividends, Yosano said. The measures underscore the difficulties now facing lenders in the world's No 2 economy, which at first appeared to have avoided the credit crisis, allowing them to invest in overseas rivals.
Tokyo's Nikkei share average briefly dropped as low as 7,141 on Monday, its lowest since 1982. The benchmark has lost about half of its value so far this year - falling by nearly a third this month alone - as a rise in the yen and a weakening outlook for the economy has curbed appetite for Japanese stocks.
The losses, which drove more risk-averse investors away from currencies such as Australian dollar and back into the yen, overshadowed Group of Seven warnings on Monday that the yen's sharp swings posed a threat to financial and economic stability.
Mitsubishi UFJ said in statements filed with the Tokyo Stock Exchange that it planned to raise up to 990 billion yen ($10.6 billion), with up to 600 billion of that in common stock and 390 billion in preferred shares. The preferred shares will not be convertible to common stock, MUFG said.
The terms of the common stock issuance have yet to be determined, as do the recipients of the preferred shares, the bank said. Traditionally, Japanese lenders hold large stakes in their corporate clients as a means to cement business ties. The value of those stocks totalled more than $250 billion at the end of March, data from the Japan Bankers Association shows.