Tokyo, Dec 20: Share prices plunged and sentiment towards the yen remained depressed despite dollar-selling intervention on Friday as worries about Japan's economy and financial system persisted.

Not even a fiscal policy U-turn in the form of a surprise income tax cut earlier in the week could provide lasting cheer.

It was a gloomy re-run of the start of 1997, when the stock market sagged and the yen sank on fears -- later realised -- that a fiscal austerity regime aimed at curbing the budget deficit would scuttle Japan's recovery.

``It's still a very vulnerable situation and some people close to the prime minister think that all the (policy) bullets have been shot and there are none left, said chief economist Takashi Kiuchi at the LTCB Research Institute.

The Tokyo stock market's main barometer, the 225-share Nikkei average, plummeted perilously close to the key 15,000 level before closing down 846.75 points or 5.24 per cent at 15,314.89.

Brokers said sentiment was battered by the failure on Thursday of medium-sized foodstuffs trader Toshoku Ltd and by a triple-digit loss in New York stocks on Thursday.

Investors fear Toshoku's collapse -- the ninth failure of a listed firm this year -- reflects a deepening credit crunch as Japan's bad loan-laden banks tighten lending ahead of the introduction of stricter capital adequacy standards and planned financial deregulation.

The share price plunge, which added to Thursday's losses, came two days after prime minister Ryutaro Hashimoto announced a two trillion yen ($15.5 billion) income tax rebate in a surprise easing of his tight fiscal stance.

The rebates were included in a ruling Liberal Democratic Party (LDP) package of economic proposals which officials said was worth about five trillion yen in total.

The LDP also unveiled this week a batch of measures aimed at stabilising the financial system, including a plan for the government to contribute 10 trillion yen worth of bonds to the Deposit Insurance Corp (DIC) to protect depositors and help boost capital at troubled financial firms.

Government officials insist that while growth this business year, ending next March, will be flat, the measures taken will both prevent future financial failures and help the economy to grow by close to two per cent in 1998-99.

The cabinet was expected to approve later on Friday government forecasts of 0.1 per cent growth in gross domestic product (GDP) in 1997-98 and 1.9 per cent the following year.

But private economists said the economy -- already seen by some as likely to contract this quarter and next -- would continue to slump if no additional policy support was provided.

``It will be a miracle if we get much positive growth in the final quarter of 1997 and the first quarter of 1998,'' said chief economist Russell Jones at Lehman Brothers. ``Flat to down is our view, and it's a moot point how the economy performs after that. Much depends on the long-term response.''

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.