Japan acted yesterday to clear its 77 trillion yen (£395 billion) mountain of bad loans through a plan for public "bridge banks" to take over failed institutions while keeping sound borrowers afloat.

The long-awaited plan, endorsed by Prime Minister, Mr Ryutaro Hashimoto, seeks to answer criticism from the US and elsewhere about Japan's frail banking sector.

"We need to erase the bad loans and change over bad borrowers to good borrowers," Mr Hashimoto said during a campaign speech.

But financial analysts said the plan was not a cure-all and would not be of much use in the case of a major bank failure.

In a report accompanying the bridge bank scheme, a joint government-Liberal Democratic Party panel said it expects to see a restructuring of the financial sector through mergers and business transfers, including "timely and appropriate" liquidation of failed institutions.

A senior finance ministry official said that he expects the pace of mergers in the financial sector to now accelerate.

He also said that if the 30 trillion yen earmarked for stabilising the industry was not enough, further steps would be taken.

The commissioner of the new Financial Supervisory Agency (FSA), Masaharu Hino, said he expected the market mechanism would drive the restructuring of the nation's financial firms.

But a top finance ministry official immediately said he does not expect a huge number of bank failures to result from the bridge bank plan. Analysts said any expectations that the scheme would cure long-standing financial sector ills quickly were exaggerated and that it could not handle the failure of a big bank, predicting disappointment as that realisation spread.

"I don't think this scheme is appropriate for any of the big banks. In the case of the big banks, they definitely are going to be too big to fail, whether that's morally or economically correct or not," said Alicia Ogawa, head of equities research at Salomon Smith Barney.

Indeed, financial markets, which had climbed overseas and in Tokyo early yesterday in anticipation of the plan, became more subdued as it became clear it would yield no surprises, such as a rumoured new tax cut.

Under the plan, failed banks would be put under temporary public administration before dissolution while their healthy loan business is taken over by public bridge banks established under a holding company called the Heisei Financial Restoration Corp.