The Bank of Japan said yesterday Washington may have to use public funds to bail out US banks hit by the credit crisis as Tokyo joined European calls for the Group of Seven states to work together calm financial markets.

The collapse of a mortgage bubble has so starved some US banks of capital that the government may have to step in if private investment does not work, said Masaaki Shirakawa, deputy governor and acting head of the central bank said before a G7 meeting this week.

"First of all, it should be efforts by the private sector. But if the efforts by the private sector are not enough, a public capital fund injection, among various options, may become necessary," Shirakawa, the government nominee to head the BOJ, told a parliamentary hearing considering his candidacy.

European finance officials have been stepping up calls for G7 nations to act together to protect the global economy and prevent another credit crisis from infecting markets.

The Financial Stability Forum, comprising central banks and finance ministries of countries with major exchanges, has drafted a paper that includes a plan to recapitalize banks and repurchase mortgages, with the possible use of taxpayer funds.

The idea - one of the more drastic options to combat the credit crisis - is expected to be discussed when Group of Seven finance chiefs meet in Washington on Friday, although a US Treasury official played down the idea as not among mainstream options under consideration on the agenda.

Japan's main opposition party yesterday backed Shirakawa for Bank of Japan governor, ending a stalemate that has left the world's second largest economy without a permanent central bank chief for three weeks in the midst of a global credit crisis.

The agreement to keep acting governor Masaaki Shirakawa in the job, to be formally voted on in parliament today, will end the first leadership vacuum at the top of the Bank of Japan in 80 years.

Agencies

(China Daily 04/09/2008 page17)