TOKYO, November 27: Hopes that public money will be used to cope with Japanese financial firms' bad loan mess boosted Tokyo share prices on Thursday, but policy-makers face an uphill battle to repair confidence in the financial sector.

Tokyo share prices rose steadily from the start to closeup a hefty 3.48 per cent or 557.65 points -- the fifth-largest gain in points this year -- at 16,603.20.

A rare statement of assurance by the Bank of Japan and the finance ministry on Wednesday evening eased jitters sparked by a recent string of financial failures, including Monday's collapse of `Big Four' brokerage Yamaichi Securities Co Ltd.

``The financial system is the basis of the economy and society. We will take all possible measures to ensure its stability,'' the joint statement said.Prime Minister Ryutaro Hashimoto, arriving in Ottawa, Canada, after an Asia-Pacific leaders' summit in Vancouver, said he was ``thinking very seriously about ways to use public funds without contradicting our fiscal reform policy.''

``It will be a very close policy call, but we will find away,'' Hashimoto said, adding that the use of public funds must be for the purpose of stabilising the financial system and protecting investors from any economic turmoil.

Hashimoto has stuck to his high-profile pledge to a tight fiscal regime aimed at cutting Japan's big budget deficit, despite calls for tax cuts to boost the economy.

Using public funds for the financial system is a political hot potato for another reason, too. A decision last year to use tax money to wind up failed mortgage firms known as `jusen', which are non-deposit-taking firms, was greeted with outrage from the public and opposition parties.

Despite growing hopes for public funds, jittery investors again sold shares in some financial firms as worries persisted about potential failures, and foreign and domestic lenders to Japanese financial institutions grew increasingly cautious.

The key overnight call rate, at which banks lend to each other, surged to 0.75 per cent before falling back later, while the `Japan premium' -- the extra cost Japanese banks are having to pay to raise funds overseas -- widened to 94 basis points from around 84 basis points on Wednesday.

The dollar edged above 127 yen and remained there in the afternoon, supported by continued concerns about the Japanese banking sector.

``We've had the heartwarming statement from the finance ministry and the Bank of Japan, but I think generally pressure on weaker banks will continue,'' said one financial analyst.

Japan has had four financial failures in November alone, including Yamaichi's collapse on Monday and the announcement on Wednesday by a second-tier regional bank that it would transfer its operations to other institutions.

Yamaichi has admitted that some of the off-book losses that helped trigger its demise came from improper `tobashi' deals, in which a brokerage shifts loss-making portfolios from one client to another with a pledge to cover the paper losses. Hashimoto said on Thursday he felt `shame' that regulators had been unaware of Yamaichi's problems, but added that the brokerage had got its just deserts.

``The most striking thing about this incident is that the market decided not to tolerate such deception,'' he said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.