TOPWRAP 3-Japan grapples with yen, crisis grips Indonesia

TOKYO, Oct 28 (Reuters) - Japan fought to hold back waves from the financial crisis, restricting investor bets on falling share prices and trying to talk down a rallying yen that threatens to deepen its economic downturn. Stock markets recovered some lost ground, but a steep decline in Indonesia's currency and the threat of an specified government response kept markets on edge as investors scrambled for the relative safety of the dollar and yen. Faced with a funding squeeze and an economic slump across much of the industrialised world, companies joined banks in the queue for government aid. U.S. automakers General Motors and Chrysler sought government cash for a merger, South Korean banks tapped a Federal Reserve funding window, Russia was in talks with China for export-backed loans for its companies and Kazakhstan pumped $5 billion into its banks. Governments around the world have agreed to inject more than $4 trillion into banks to contain the financial crisis, and Bank of England said the strong medicine appeared to be working. "Exceptional interventions by governments and central banks should help stabilise the banking system in the period ahead," the bank said in twice yearly report.. "While there are still risks in the wider financial system, the immediate response to the measures has been positive." The Japanese banking system, which largely escaped the fallout from U.S.

mortgage defaults last year, began to look shaky this week as the stock market crashed, losing a third of its value in October. Japanese banks, which mostly avoided instruments linked to U.S. mortgages, had invested in the stock market, and the three largest lenders are looking to replenish capital lost on the bourse. CRITICAL The government banned naked short selling with immediate effect on Tuesday, bringing the move forward by one week. Naked short selling allows traders to effectively sell stocks they don't already own and without borrowing them first in the hope that they will profit by buying stocks back at a lower price. "Similar restrictions have already been put in place in the United States and Europe but Japan has lagged behind," Nakagawa said. "I found a lag of a few days is critical for the Tokyo stock market." In Indonesia, President Susilo Bambang Yudhoyono said he could unleash a new policy response after the rupiah tumbled almost 9 percent to a 7- year low and central bank intervention failed to slow the slide. He gave no details. The high-yielding rupiah had held relatively stable earlier this year, underpinned by foreign demand for high-yielding government bonds. But it has lost almost 14 percent this week as investors dumped riskier emerging-market assets. The yen is being lifted by the same tide of capital, having been the currency investors borrowed to finance bets on high yielding assets. The surging yen has compounded fears among exporters as their key markets lurch toward recession. The yen has leapt about 20 percent on a trade-weighted basis <.IBOXXFXJPY> this month alone, as investors have unwound risky trades and rushed to the relative safety of the currency. "The yen's rise in the past week is astonishing, but it does not reflect Japan's economic fundamentals," Japanese Economics Minister Kaoru Yosano told a news conference. The Group of Seven finance ministers and central bank governors singled out the yen on Monday in a rare statement warning that its rally threatened stability, raising the prospect of currency intervention. However, the yen barely paused for breath after the statement as investors bet Japan's G7 partners had little appetite to intervene in the midst of the financial turmoil. With the yen trading at around 94 per dollar, Carlos Ghosn, chief executive of Nissan Motor Co and Renault <RENA.PA>, said it would be difficult for Nissan to compete, especially with U.S. car sales plunging 26 percent in September from a year earlier. "Nobody reasonable is going to tell you that next year we're going to be out (of this crisis)," he said. SURVIVAL U.S. automakers are faring much worse than their Japanese rivals and two of America's "Big Three" are planning a merger to survive the crisis. General Motors Corp and Chrysler LLC's owner, Cerberus Capital Management asked the U.S. government for a $10 billion rescue package to support the merger, sources familiar with the talks said on Monday. The U.S. government cobbled together a $700 billion plan to bailout Wall Street last month, after mortgage defaults and credit writedowns wrecked lenders and insurers. More banks lined up for cash on Monday. Financial companies including Comerica Inc, SunTrust Banks Inc and State Street Corp agreed to sell stakes to the U.S. Treasury Department in exchange for cash infusions, part of the rescue plan approved by Congress earlier this month. Two South Korea banks joined the queue for U.S. government dollars on Tuesday as the country grappled with an acute dollar funding squeeze and a crisis of investor confidence. State-owned Korea Development Bank (KDB) said the U.S. Federal Reserve had agreed to buy up to $830 million in bonds for dollar funds, the first time a South Korean bank has been allowed to do so. Kookmin Bank also said it was lining up to tap the same Fed facility. The Fed had signalled last week its funding of short-dated securities purchases to free up frozen lending markets could include a wider range of issuers than a previously selected 50 financial institutions. South Korea has felt the brunt of the crisis in Asia and its banks, with their large short-term foreign borrowing, have looked vulnerable to the credit crunch. In another cross-border funding deal, Russia and China are preparing to sign a long-term oil supply agreement on Tuesday and Beijing is in talks to lend Russian companies $20 billion to $25 billion in export-backed loans, industry sources said on Monday. And the government of Kazakhstan offered capital injections to the four largest local banks for a total of up to $5 billion. (Writing by Alan Raybould; Editing by Dayan Candappa) .

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