Dow Jones

TOKYO — Japan, pressured by the United States and its own central bank, is putting the final touches on measures to bolster its wobbly banks by forcing them to clear bad loans from their books and pare down their massive stock holdings.

The bank steps, the centerpiece of an economic and stock market package, will call for banks to limit their share holdings to their amount of capital by selling stock off-market to a state-backed fund over three years, according to officials and news reports.

The authorities are also expected to establish numerical targets for banks to clear from their balance sheets the mountain of bad loans that have festered there since Japan’s asset bubble burst a decade ago.

“Banks currently hold on to too many shares,” top financial regulator Hakuo Yanagisawa said Tuesday. “These holdings must somehow be released to outside” investors, he said.

Banks are said to hold the equivalent of 150% of their capital in shares, a result of Japan’s extensive network of cross-held shares that cemented corporate ties in the postwar era.

The government is expected to own more than one-third of the stock-buying fund and gradually, over five years, sell the shares unloaded by the banks. Taxpayers would share the eventual profits or losses with the banks that own the rest of the fund.

Mr. Yanagisawa, the financial services minister, said at a news conference that a share-dumping deadline is being considered but he declined to specify. “It is better not to get everyone excited about this issue, please wait for a final decision,” he said.

Limiting banks’ share holdings could help by decreasing their exposure to share-price fluctuations, said bank analyst Masamitsu Ohki at Societe Generale. But it could have side effects in weakening banks’ relations with companies — which have long been cemented by mutual stock holdings — Mr. Ohki said.

Particularly hard hit would be Japan’s Big Four megabanks, three of which came into existence this week, he said. Less affected would be lenders such as Asahi Bank, which did not join the merger mania, and regional banks that are focusing on retail business and dealing with smaller companies.

Bank of Japan, which essentially knocked interest rates to zero last month to help ease the pain of drastic debt disposal, has pointedly insisted banks must do their part or its ultra-easy monetary policy will not help the economy. Bank of Japan said Tuesday that its bank audits this fiscal year will place priority on assessing whether banks have sufficient capital, and the possibility of their loans going sour.

Banks for years have provisioned against bad loans but have not severed the lifeline to many borrowers, so their loan assets have continued to deteriorate as the economy staggered and land prices fell.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.