Japan's Prime Minister Taro Aso and his cabinet are compiling a stimulus package to support the country's banks and the economy as the credit crunch and losses on mortgage-related derivatives roil financial markets and threaten to push the global economy into a recession.

Investors are pounding Japanese banks as unrealized losses on shareholdings held by the six leading banking groups swelled to 1.2 trillion yen Friday in the wake of the steep market sell-off. Losses are even larger on their broader securities portfolio, including bonds and securitized products. Economic and Fiscal Policy Minister Kaoru Yosano was quoted on national television on Sunday as saying the government should increase the amount of funds injected into mainly regional banks to JPY10 trillion. Japan's largest and strongest bank, Mitsubishi UFJ Financial Group is reportedly considering a capital call of JPY990 billion including the issuance of up to JPY300 billion of preferred shares in order to insure it can maintain a capital ratio of over 10%. The takeover of the remainder of UnionBancal Corp. and Morgan Stanley in the US involved tens of trillions of yen of investment, meaning that its capital ratio could significantly deteriorate. The BIS-required capital ratio for internationally active banks is 8%.

As Japanese banks still count unrealized gains/losses in their Tier 2 capital, they remain susceptible to heavy sell-offs in securities markets. Moreover, it appears that government "emergency countermeasures", ostensibly aimed at bolstering confidence in Japan's financial institutions and its economy--in combination with reports that Mitsubishi UFJ Financial plans a big capital increase, have sent the wrong messages, i.e., that investors do need to be concerned about the health of Japanese banks as well.