The latest decline in the Stock Markets only serves to underline just how fragile the Japanese banking system actually is.The Nikkei 225 index fell below 10,000 for the first time in five months today dropping below a level at which it begins to threaten the health of the entire Japanese financial system. We don't know for certain what will be the 'tipping points' for the Japanese system, but a Nikkei much below 10,000 for any length of time could well be one of them:
"There's a direct connection between the stock market and the banking system, " said Marshall Gittler of Bank of America. "When it falls below 9,600, that's the point at which the main banks' capital adequacy ratios go below 10 per cent. These drop below [the mandatory] 8 per cent somewhere in the 8,000s, so there's a little way to go before they have to shut down the banking system."
Banks must close their books for the half year at the end of September, which may encourage the government to take measures to bolster the stock market. In February, before the end-of-year close in March, the government made little secret of the fact that it wanted to see the Nikkei rise above 11,000, as it duly did. Recently, members of the ruling Liberal Democratic party have proposed extending the scope of a body that buys shares from banks to permit it to purchase shares from companies in other sectors.
"The problem in Japan is that when anything goes wrong at some point it will start affecting the banks," said Peter Tasker of Arcus Investment. "And that of course can only be addressed by public policy."
Source: Financial Times