TOKYO, Nov 17: Japan's 10th largest bank Hokkaido Takushoku Bank announced on Monday that it was going out of business because of a bad loans crisis, ironically setting off a major stock market rally.

The Nikkei average of 225 leading shares rose 944.85, or 6.26 per cent to 16,027.37 by midday, taking the closure as a sign that Japanese authorities were finally taking action to solve the nation's economic woes. Its December futures also rose the daily limit of 1,000 points to hit 16,040.

The dollar rose to above 126 yen in early trade due to concerns triggered by the Hokkaido news over the Japanese financial system. It was however, beaten down to around 124.50 yen after Japanese Vice Finance Minister Eisuke Sakakibara said Japan was prepared to act appropriately for forex stability.

In a virtual declaration of bankruptcy, Hokkaido Takushoku said it was handing over its regional operations in its home base on the northern most main island of Hokkaido to North Pacific Bank, a Hokkaido-based mid-size regional bank.

The bank was seeking a buyer for its Tokyo area operations.

Finance Minister Hiroshi Mitsuzuka told a hurriedly arranged news conference that the Bank of Japan (BOJ) will provide the necessary funds to Hokkaido Takushoku Bank to help it give depositors their money back.

The funds are expected to come in the form of the BOJ's special unsecured loans, where the recipient bank does not have to put up collateral. The troubled bank, with assets of 9.5 trillion yen, had in September postponed its planned merger with crosstown rival Hokkaido Bank Ltd because of the former's massive problem loans, which, at 934.7 billion yen, are more than 13 percent of its total loans outstanding.

Japan's financial authorities, determined not to let one of the country's 20 big banks fail, had pressured the two banks to tie the knot so that Hokkaido Takushoku could cope with its loan woes.

But the weight of bad loans and Japan's declining economy in recent months, especially in mostly rural Hokkaido, in the end spelled doom for the bank's survival. ``In addition to lower credit ratings and weak stock prices, which reflected recent worries about the credit worthiness of our bank, the recent collapse of financial firms has made it increasingly difficult for us to raise money in the short-term money market,'' the bank said in a statement.The bank said its president Sadamasa Kawatani and other board members of the bank will resign from their posts at an appropriate time to take management responsibility for the bank's difficulties. Kimio Yamaguchi, head of the Finance Ministry's Banking Bureau, said it may take ``six months to one year'' before North Pacific Bank takes over the operations of Hokkaido Takushoku Bank.

Mitsuzuka appealed to depositors to stay calm and not to stage a run on the bank, saying, ``I strongly hope that depositors will take a sensible course of action.''

Hokkaido Takushoku Bank was founded in 1900 as a government-backed bank charged with financing development projects in Hokkaido. It has 5,900 employees and 204 domestic branch offices.North Pacific Bank was founded in 1917 as a small deposit-taking institution. After becoming a mutual bank in 1951, it was designated as an ordinary commercial bank in 1989. Its combined assets, including loans, stand at 1.82 trillion yen. The bank has a work force of 1,947 and a network of 122 branch offices.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.