Japan stocks soar, Tokyo unveils

By Elaine Lies and Yuzo Saeki

TOKYO (Reuters) - Japanese share prices soared on Tuesday, buoyed by international government pledges to pour cash into banks and restore confidence in the global financial system.

Japan also unveiled steps to stabilize its financial markets, including a possible injection of public funds into regional banks that the government said would be aimed at enhancing smooth financing for smaller firms facing a possible credit crunch.

Tokyo's Nikkei share average .N225 surged 13.04 percent by midday, encouraged by gains on Wall Street and in Europe and more than making up for Friday's slide, which was its worst one-day loss since the 1987 stock market crash. .T

The Nikkei ended the morning up 1,079.13 points at 9,355.56 after rising 13.76 percent earlier. That compared to the 13.24 percent leap logged on October 2, 1990, which was the benchmark's biggest one-day gain since 1945.

The broader Topix rose 12.7 percent to 947.47, a gain of more than 100 points.

The jump in Japanese share prices followed the biggest one-day gains ever in the Dow Jones industrial average .DJI and the S&P 500 index .SPX, both of which rose 11 percent on Monday. Wall Street recorded its worst week in history last week amid panic over collapsing banks and fears that major economies were headed toward recession.

"We're seeing both short-covering and a lot of fresh buys," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities, adding that he expected further gains.

"Basically, the market fell too far last week. I'd say 9,600 isn't that difficult a short-term goal," he said.

But caution lingered, and Yamagishi said rises beyond that level would probably be tough given lingering worries about the global economy and some doubts about the U.S. government's agreement to take stakes in several big banks.

"HEIGHTENED ALERT"

Before the market opened, Japan's government announced a series of steps including the possible enactment of a law to enable the injection of public funds into regional banks.

Finance Minister Shoichi Nakagawa said in a statement that Japan's financial system was relatively stable and sufficient and safety nets were already in place. But he added: "I will continue to monitor on a heightened alert the impact of the recent rapid fall in the stock markets on Japan's financial sector and real economy."

Speaking at a parliamentary panel later, Nakagawa welcomed the Nikkei's rise but said the global crisis appeared to be affecting Japan's financial sector and economy.

"I have been instructed by the prime minister to be ready for any contingency that could arise at any time," he said.

The finance ministry also said in a statement that the government would consider a temporary freeze on the sale of government-held shares on the secondary market and that it expected the Bank of Japan also to consider freezing sales of the shares it holds.