Dec. 19 (Bloomberg) -- Japan’s government will buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital and support a sagging stock market.

The amount is part of a stimulus package totaling 75 trillion yen that also includes 10 trillion yen for capital injections into banks, the Cabinet Office said in a statement. The buyback plan is subject to approval by Japan’s parliament.

The government is encouraging banks to lend more to small companies struggling to secure funds amid the worst global financial crisis since the Great Depression. Investment losses on stocks have eroded capital at banks including Mitsubishi UFJ Financial Group Inc., crimping their capacity to lend.

“The government’s purchase will prevent banks from selling their stockholdings in the market and creating oversupply,” said Hideo Arimura, who oversees about $1.9 billion at Mizuho Asset Management Co. in Tokyo. “However, there is no guarantee banks will sell their holdings.”

Mitsubishi UFJ, the nation’s biggest bank, rose 3.3 percent to 560 yen as of the 3 p.m. trading close in Tokyo, while Mizuho Financial Group Inc., the second-largest by revenue, climbed 1.2 percent. The Topix Banks Index, tracking 84 lenders, gained 0.6 percent.

The Nikkei 225 Stock Average fell 44 percent this year and is set for a record drop. It’s decline has been compounded by mark-to-market accounting rules, forcing companies to book losses on illiquid holdings of securities.

The Bank of Japan cut its benchmark interest rate to 0.1 percent from 0.3 percent today and said it would buy more corporate debt as a deepening recession chokes off funding for businesses.

Capital Raisings

Finance Minister Shoichi Nakagawa said on Oct. 28 that Japan would ease mark-to-market rules by allowing companies to take into account measures including estimates of future cashflow, interest rates and values determined by exchanges, rather than the latest prices in illiquid markets.

South Korea said yesterday it would raise 20 trillion won ($15 billion) from the central bank and investors to boost bank capital via a fund to buy lenders’ preferred stocks and bonds. The government is also guaranteeing $100 billion of banks’ overseas debts and has pooled a 10 trillion won fund to buy unsold corporate bonds.

Mitsubishi UFJ and other Japanese financial institutions have announced plans to raise at least $37 billion combined in capital to shore up their balance sheets.

Jonathan Allum, a strategist with KBC Financial Products in London, said he was skeptical of the share-buyback plan.

‘Larger Than Needed’

“It is far larger than would be needed to soak up any unwanted holdings by the banks,” he said in a report yesterday.

Kotaro Tamura, a member of the ruling Liberal Democratic Party and a former vice minister of Japan’s Financial Services Agency, said in an interview yesterday that it is not enough.

He and 10 other lawmakers planned to meet with Prime Minister Taro Aso to propose a fund of 80 trillion yen, which would allow the government to buy shares from the market and not just banks, as well as invest in real-estate investment trusts and property, Tamura said.

Global stock markets have fallen 46 percent in value to $32 trillion in 2008 as the credit crisis sent the U.S., Europe and Japan into the first simultaneous recession since World War II.

The U.S. economy likely won’t start recovering from the recession for at least another year, making this the longest downturn since the 1930s, according to Harvard University economist Martin Feldstein, a member of the committee that charts American business cycles.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: December 19, 2008 01:30 EST