* BOJ to buy $11 bln in stocks from Japanese banks

* BOJ says stocks markets biggest risk facing banks

* Nikkei rises on news, but later falls back

* MUFG faces loss, to slash forecast, report says
(For more stories on the financial crisis click [ID:nCRISIS])
(Adds comments from BOJ governor)

By Hideyuki Sano and Leika Kihara

TOKYO, Feb 3 (Reuters) - The Bank of Japan pledged on Tuesday
to buy $11 billion in stocks held by Japanese banks, saying their
biggest risk was exposure to share markets and that the measure
would help stabilise the country's financial system.

It revives a scheme from earlier this decade to head off a
domestic banking crisis and comes as Japanese banks seek to limit
their losses from the Tokyo stock market that has fallen by more
than a third since the end of last March in the face of the
global financial storm.

"If you look at what kind of risks big Japanese banks have
now, the biggest risk is not credit risk. It's volatility in
share prices," said Bank of Japan Governor Masaaki Shirakawa.

"Share prices fluctuate on various factors, not just domestic
factors. Right now international markets are not stable and
Japanese share prices are falling. Those banks always have to
consider such risks. That's the reality."

Shirakawa said the central bank decided to act ahead of the
end of the financial year in March, when companies will finalise
their accounts and because anxiety over the Western financial
system is growing again.

"Moves in the international financial markets were a big
factor. The anxiety over the western financial system is rising
again. And the end of Japan's financial year is approaching.
That's what's determined the timing."

Japan's benchmark Topix index .TOPX has fallen 35 percent
since the end of last March, chopping about 9 trillion yen off
the value of bank's stockholdings then of 25.6 trillion yen,
based on Reuters' calculations.

Domestic banks have a long tradition of taking stakes in
their corporate clients to cement business ties, a practice that
shreds profits when the market plunges.

The BOJ move was announced as Japan's Sankei newspaper said
the country's biggest bank, Mitsubishi UFJ Financial Group
(8306.T: Quote, Profile, Research), would post a loss for April to December and slash its
annual forecasts, reflecting both stock losses and a rise in bad
debt. [ID:nT349689]

Smaller lender Shinsei Bank (8303.T: Quote, Profile, Research) said it would swing to a
net loss of 48 billion yen ($535 million) in the year to the end
of March. Previously it had forecast a 62 billion yen profit.

Last week, Mizuho Financial Group (8411.T: Quote, Profile, Research) posted a $1.6
billion loss for its third quarter, citing stock losses.

The Nikkei stock average .N225 rose after the BOJ decision
before slipping to close down 0.6 percent as grim earnings
outlooks offset the optimism over the BOJ plan. [.T]

The yen fell broadly on hopes that the central bank buying
would ease risk aversion. JPY= [FRX/]

The BOJ aims to start buying shares by the end of February
from banks that operate internationally and those that hold stock
worth more than half of their Tier 1 capital. About 30 banks
including big and regional lenders are thought to be eligible to
apply based on those criteria.

QUESTIONS

Some analysts questioned whether the BOJ's measure would do
much to help an economy, which like much of the developed world,
is already deep in recession.

"If anything it is a positive. But it remains to be seen how
much of an impact it will have on stabilising the broader
financial system," said Jason Rogers, credit analyst at Barclays
Capital in Singapore.

Under the scheme, the BOJ will buy up to 1 trillion yen ($11
billion) worth of listed shares held by Japanese banks up until
April 2010.

It will buy shares in companies that have credit ratings of
at least BBB-minus, the lowest investment grade.

The BOJ's measure follows a government plan yet to be
approved by parliament to buy up to 20 trillion yen in shares
from banks. It would revive a similar scheme the BOJ ran earlier
this decade when authorities were trying to stave off a domestic
banking crisis.

Back then, the central bank bought 2 trillion yen in stocks,
twice the amount it has proposed this time around, in a two-year
scheme that ran until 2004 to help many commercial banks
staggering under a huge pile of bad loans and stock losses.

Slumping stock markets are a global problem for banks. A
South Korean regulator reported on Tuesday that the country's
banks posted its first combined loss in eight years in the final
quarter of 2008. [ID:nSEO341911]

RISKS FOR BANKS

The BOJ's plan is the latest in a string of support measures
as the world's second-largest economy struggles with recession.

Analysts estimate Japan suffered its biggest contraction
since 1974 in the final quarter of 2008 after shrinking in the
second and third quarters of the calendar year. [ID:nT303524]

Data on Tuesday showed Japanese overtime pay, a barometer of
corporate activity, marked the biggest annual fall in nearly 16
years in December. [ID:nT349021]

The central bank has cut interest rates to 0.1 percent and
decided to buy corporate debt to smooth corporate funding, but
markets have remained jittery over the global downturn.

Shirakawa suggested that the idea of printing money, floated
by a few ruling party lawmakers, would be harmful. [ID:nT304071]

He added that the stock-buying scheme would help stabilise
the financial system, although some analysts questioned whether
banks would make full use of the scheme.

"I don't know how much need financial institutions may have
to sell shares to the BOJ, but at least having the system for the
central bank to purchase shares will give a sense of relief,"
said Izuru Kato, chief economist at Totan Research.
(Editing by Hugh Lawson)