NEWS ANALYSIS : Japan Finally Addresses Its Bank Woes : Economy: Officials try to shore up the institutions, fearful that an industry spiral could push the stock market lower.

It took a while for this nation to reach a consensus, but it’s now official: Japan’s financial system is in trouble and needs serious government help.

Ministry of Finance officials, who have long shrugged off the nation’s economic and financial problems as isolated and temporary, are suddenly anxious about market trends and are moving to try to control the invisible hand of the market.

Not only are officials acknowledging that Japanese banks are in danger, they are admitting for the first time that financial problems are casting a shadow on the economy by undercutting industry confidence and depressing consumer spending.

The plunge in land and stock prices over the last three years has wiped out trillions of dollars in asset values. Bad loans held by financial institutions have mushroomed to hundreds of billions of dollars.

“What initially appeared to be isolated cases of bank troubles turned out to be a more widespread pattern,” said one Finance Ministry official.

After watching share prices hit a 6 1/2-year low Tuesday, Finance Minister Tsutomu Hata called a news conference to show that the ministry was back in charge. He outlined a package of emergency accounting measures that give banks more flexibility in dealing with bad loans. The ministry hopes that the measures will also enable companies to avoid fire sales of land and stock holdings, which could speed a downward spiral in markets.

The announcement was the first in a series of new proposals that have since been floated to stop land and stock price declines and to strengthen the nation’s financial footing. Two recent proposals call for the government to help finance the purchase of land obtained by banks through an increasing number of foreclosures.

Hata said that Japan’s financial system is facing its “most severe” situation since World War II and that the ministry had to make its “utmost effort” to maintain confidence in the nation’s financial institutions.

Although many brokers--seeing the moves as an elaborate shell game--initially responded skeptically to the government proposals, the stock market responded positively. By the end of Thursday, the Nikkei index had climbed 1,000 points from its Tuesday low of 14,309.

“This (emergency measure) shows a recognition they are in a crisis,” said Masaru Takagi, chief economist at Fuji Research Institute. “The government is finally moving.”

Takagi said he hopes that the measures, when combined with the government’s $55-billion spending package to be announced this month, will finally help turn around the gloom that has been pushing down stock prices.

“They came close to the edge of losing confidence, but now they seem willing to do something concrete,” said Alicia Ogawa, an analyst at S. G. Warburg Securities (Japan).

Finance Minister Hata’s plan would allow banks to avoid reporting losses on their share holdings for the six-month period ending Sept. 30. The Finance Ministry will also ask banks and insurance companies not to sell their share holdings.

Officials are worried that banks will sell off their share holdings in an effort to temporarily boost profits and maintain dividend payments.

The ministry is also close to reaching agreement with tax authorities on a measure that would give tax breaks to banks that write off bad loans or give low-interest loans to troubled subsidiaries.

Japan is also sending the signal, for the first time, that the downward spiral in land prices should be stopped. The government is proposing to spend about $8 billion to help government agencies buy land from banks to use for various public works projects.

Another plan calls for banks to jointly establish a separate company, supported by government loans, to buy up property that they have acquired as collateral for bad loans.

On Wednesday, Bank of Japan Gov. Yasushi Mieno appeared to reverse his previous stance in favor of lower land prices when he declined to shoot down the proposals. Mieno was instrumental in the interest rate hikes three years ago that burst a speculative bubble and sent stock and land prices tumbling.

Among other proposals under discussion is one to tap large pools of money, including public pension funds, for investment in stocks. The Finance Ministry may also offer tax incentives to encourage employees to buy shares in the companies they work for.

Boosting share prices by another 10% to 20% is critical if banks are to meet capital requirements established by the Bank of International Settlements. If they fail to meet the requirements, the banks will be required to cut back on their lending.

The stock market is still 60% below its 1989 peak, and some skeptics say the new measures are little more than window dressing to hide banks’ non-performing loans.

While Finance Ministry officials admit that the financial system is in trouble, they continue to downplay the broader economy’s troubles and to oppose more aggressive tax cuts and spending plans.

One official admitted that the primary aim of the package was to improve market psychology and that the concrete measures being offered were just “the first step” in the long process of restoring banks’ health.

To revive the stock market will require more than strengthening banks. Millions of individual investors believe that the government duped them when it arranged for shares of Nippon Telegraph & Telephone Corp. to be sold to the public, then let their value fall to a fourth the issuing price.

And wounds are still fresh from the brokerage scandals last year in which corporations were compensated for their stock market losses, but smaller investors weren’t.

As long as speculators and individual investors were the only ones hurt by the stock market’s fall, the government wasn’t concerned, said a cynical Hiroshi Okumura, professor at Ryukoku University. “Now that the banks are the big losers, they (Finance Ministry) can’t take the pain.”