UPDATE 2-Japan banks should reduce stockholdings-bank lobby

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TOKYO, Nov 25 (Reuters) - Japan's banks should consider reducing their hefty share portfolios, as the stock market tumble has exposed the risk of holding stakes in corporate clients, the head of its banking lobby said on Tuesday.

However, the industry group currently has no plans to ask the Bank of Japan to buy some of the shares, as had been proposed as part of a bank bailout, said Seiji Sugiyama, chairman of the Japan Bankers Association.

Japanese banks generally take big stakes in their clients as a way to cement business ties, a tradition of "cross-shareholding" that critics say weakens corporate governance.

Estimated at more than $250 billion at the end of March, the value of those shares has plunged, forcing banks to cut their earnings forecasts and raise new capital.

"I personally think we need to lower (stockholdings) somewhat," said Seiji Sugiyama, who also heads the retail arm of Mizuho Financial Group (8411.T), Japan's second-largest lender.

"However, there are certain Japanese economic customs, so we cannot cut these shareholdings to zero right away. We need to take time and consider how to best handle the issue."

Tokyo's Topix index , the broadest measure of Japanese stock performance, has fallen almost a third since the end of March. In October alone it dropped 20 percent.

Mitsubishi UFJ Financial Group (8306.T), the country's biggest bank, posted a 61 percent drop in quarterly profit this month and has said it will raise more than $10 billion to replenish capital depleted by the stock downturn and an investment in Morgan Stanley (MS.N).

Mizuho and Sumitomo Mitsui Financial Group (8316.T), Japan's third-largest bank, have also cut their outlooks and unveiled fundraising plans.

The industry group is also not pushing for the Bank of Japan to buy some of those shares from lenders, an idea that had been floated as part of a plan to help shore up Japanese banks, Sugiyama said.

Were banks to sell their shares at current prices to the central bank, they would likely book losses on the sales, he said. (Reporting by David Dolan; Editing by Michael Watson)