FINANCIAL MARKETS : Japanese Stocks Soar as Sumitomo Faces Losses

TOKYO —  Stocks moved sharply higher in Tokyo on Monday, boosted by hopes that Japanese banks are finally starting to confront their burden of hundreds of billions of dollars of bad debt.

The 225-stock Nikkei index jumped 648.53 points, or 3.6%, to close at 18,752.88 Monday. This was the Nikkei’s steepest one-day gain since Jan. 31 last year, when it rose 1,471.24 points to 20,229.12 in response to passage of political reform bills by Japan’s parliament. Today, the Nikkei was down 82 points to 18,670 in early trading. Monday’s gains nearly returned the widely watched index to where it was before a 1,055-point plunge on Jan. 23, which was triggered by realization around the world of the massive scale of destruction suffered in the Jan. 17 Kobe earthquake.

Sparking Monday’s advance was an announcement by Sumitomo Bank Ltd., made after the close of trading Friday, that it will write off a total of $8.1 billion in bad loans for the fiscal year ending March 31.

While Sumitomo said this meant it would post a loss of about $2.82 billion for the year, this was interpreted positively by most market players.

Sumitomo’s acceptance of a loss will make it the first major Japanese bank to report a loss since World War II. Analysts and investors took the action as a sign that other banks might follow in its path, which could position financial institutions to lend stronger support to Japan’s budding economic recovery in the future.

Ever since the collapse of the late-1980s “bubble” economy, Japanese banks have been burdened with extensive portfolios of non-performing loans backed only by real estate that dropped sharply in value.

As of September, about $450 billion in bad loans held by Japanese banks could be documented if bad debt were calculated by U.S. standards, although the banks listed the figure at $136 billion. The sum has not been reduced appreciably since then.

As long as banks tried to postpone dealing aggressively with the bad-loan problem, they were under pressure to hide losses and post profits by selling stocks that had appreciated in value. But if banks write off losses instead, they need not sell stocks.

“Sumitomo Bank really did a job of pulling the market higher today,” Yasuo Ueki of Nikko Securities Co. told Kyodo News Service. “Here was a sign that Japan is beginning to solve its problem over bad loans.”

The Nikkei index’s advance was led not just by Sumitomo but by banks in general and by real estate firms that rose in conjunction with the strength of bank stocks.

The rally spread to construction firms, steel makers, electric machinery manufacturers and brokerages.