Japan signals broader bail out plan, markets firm

BEIJING (Reuters) - Japan signaled a willingness to broaden its bank bailout plan to include the country's big banks as it considers ways to bolster its defenses against the global crisis even as signs emerge that banks and investors are cautiously regaining confidence.

Federal Reserve Chairman Ben Bernanke backed government spending as a fresh measure to support the world's biggest economy following the tumult since the collapse of Lehman Brothers last month.

Stock markets in Asia picked up on where the United States and Europe left off, with key indexes up in Japan and across most of the region.

In money markets, the interbank cost of borrowing dollars for three months recorded on Monday the sharpest fall since January. Short-term funding costs eased further in Asia on Tuesday.

In contrast to the market mood, South Korea President Lee Myung-bak said a looming global recession could swamp measures taken by the country to steer through its own shoals of a heavily indebted banking system and slowing economy.

"The overall situation is more serious than the 1997 (Asian financial) crisis. Back then it was an Asian crisis but today the entire world economy is at risk," Lee was quoted as saying by presidential spokesman Lee Dong-kwan, according to Yonhap.

Korean authorities announced a $130 billion bailout package at the weekend, joining other governments around the world that have pledged well over $3 trillion to resolve the financial storm that has toppled banks in the United States and Europe.

Another stark reminder of the seriousness of the crisis came from a report that Pakistan was in talks to obtain up to $15 billion in rescue money from the International Monetary Fund and other bodies.

Pakistan, whose support is crucial to the NATO mission in Afghanistan, needs a massive cash infusion to stabilize its economy and pay for necessary imports.

BIG BANKS

In Japan, Economics Minister Kaoru Yosano said the country's big banks should also be entitled to injections of public funds if need be as the government considers reviving a law that allows the recapitalization of banks.

"When considering the need to facilitate lending to small firms, I can't see any reason why big banks should be discriminated against," Yosano told a news conference.

His comments came as the Japanese government's nominee for the post of central bank deputy governor said tensions were gradually mounting in the country's money markets.

"The uncertainty over the Japanese economic outlook is growing further," Hirohide Yamaguchi said in a confirmation hearing in parliament's lower house.

Australia offered a counterpoint, with the head of the central bank saying that its aggressive interest rate cut this month and fiscal stimulus could cushion the domestic economy.

"There is much more work to be done yet... but the world, it seems to me, is on a much better path," said Glenn Stevens, Australia's central bank governor.

"The likelihood of a global catastrophe has in fact declined over the past couple of weeks."

MORE U.S. STIMULUS?

Federal Reserve Chairman Ben Bernanke on Monday backed more government spending to help the world's biggest economy through what could be an extended period of subpar growth.

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke told Congress in his first endorsement of a second U.S. stimulus package.

The White House said it too was open to a stimulus plan.

In China, which is on track for its first year of single-digit growth since 2002, the economic assessment diverged from the bleak to the cautiously optimistic.

The head of the National Development and Reform Commission, the country's top planning body, said China could maintain a pace of around 9 percent, offering some relief to the rest of the world from creaking U.S. and European economies.

But Donald Straszheim, head of Roth Capital and a former chief economist at Merrill Lynch, said China's growth rate could slump to 6.5 percent, which would be its slowest pace since 1990.

The International Labor Organization said on Monday that 20 million jobs will disappear by the end of 2009 because of the financial crisis, the worst since the 1930s Great Depression.

Governments have promised $3.3 trillion, about equal to the annual economic output of Germany, to guarantee bank deposits and bank-to-bank lending, and in some cases have taken stakes in banks with toxic assets.

Policy makers have tried to craft solutions on the fly, raising the risk of miscalculations.

Australia's government was forced to defend its plan to guarantee bank deposits after a media report warned that the move had caused financial dislocation by prompting a rush of money from uncovered schemes into the back-stopped deposits.

(Reporting by Reuters bureaux worldwide; Editing by Neil Fullick)