MUFG to raise $10.6 billion

By David Dolan

TOKYO (Reuters) - Mitsubishi UFJ Financial Group, Japan's biggest bank, said it would raise up to $10.6 billion (6.87 billion pounds) to replenish a capital base depleted by a plunging stock market and its investment in Morgan Stanley.

News of Mitsubishi UFJ's fundraising came as Tokyo stocks tumbled to their lowest in 26 years, prompting Japan's government to beef up a bailout package for the country's ailing banks, which are big investors in domestic equities.

Prime Minister Taro Aso said the government would expand a scheme to gives lenders access to public money and strengthen rules on short-selling, and he called on the state to buy shares directly from banks to reduce their market exposure.

He has also called for extending tax relief on income from stocks and dividends, as a means of reviving investor appetite for stocks.

Although Japanese banks have had little exposure to the risky credit instruments that crippled Wall Street, investors now fear lenders' extensive shareholdings and rising bad-loan costs will unravel profits this year.

"The problem here is that the stock market has fallen. It has nothing to do with derivatives or anything like that. As stocks have dropped, banks are faced with rising paper losses," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

The government measures underscore the difficulties now facing lenders in the world's No.2 economy, which at first appeared to have avoided the credit crisis, allowing them to invest in overseas rivals.

Tokyo's Nikkei share average briefly dropped as low as 7,141 on Monday, its lowest since 1982.