The question now is whether the government should inject public funds into banks anew to stabilize the financial system.

The Cabinet of Prime Minister Junichiro Koizumi has concluded that this is unnecessary at present, although his ministers' views conflicted.

In a rare move, Bank of Japan Gov. Masaru Hayami recently urged Koizumi to use public funds. Within the Liberal Democratic Party, voices in favor of such injections are gathering steam.

Banks now seem unable to get back on their feet. Major credit-rating agencies have downgraded their ratings on banks to as low as BBB. With the outstanding balance of loans falling, banks are not fully playing their financial intermediary role.

These developments indicate the financial system is in a critical state. It is thus fair to say public funds will be injected into banks eventually. If the government announces this decision, stocks are likely to raise their upside to around 1,100 to 1,150 as measured by the Topix index.

But it is imprudent to conclude that the injection of public funds will work as a cure-all. The market is unlikely to begin medium-term uptrends without steady advances in structural reforms and a bottoming-out of economic activity.

The government should push ahead with structural reforms while treating the injection of public funds as a necessary step for them.