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Japanese govt steps in to save its stock market

Warren Buffett may have called the current crisis in the US 'an economic Pearl Harbor', the Japanese government is in no mood to allow their stock market to become a another Hiroshima-. As reported in a leading, that it has passed a legislation allowing the government to buy shares from the market until March 2012 if share prices plunge to an extent that is seen as an economic emergency. While the exact contours of the 'economic emergency' have not been defined, the fact that the government is willing to bailout shareholders will itself offer enough stability to the Japanese market.

The plan strictly limits buying shares to cases where the price-to-book-value ratio of a majority of listed companies falls far below 1.0 time and the price earnings ratio falls below ‘normal’ levels.

The Japanese government will set up a public body which on instructions from the country’s prime minister would buy a basket of shares such as exchange-traded funds (ETFs). The funds needed for the purchase would be borrowed from the Bank of Japan as well as private financial institutions, backed by a government guarantee. Further, the government would cover any losses when the body is dissolved in 2012.

While the step seems radical enough to cap any further fall in Japanese stock market, considering that the stock prices hit a 26-year low last month and that the government has already unveiled an economic stimulus package of 50 trillion yen, it may well be the final resort

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