In the first step of what Tokyo hopes will be a path to economic recovery, the government yesterday took control of troubled LongTerm Credit Bank of Japan Ltd (LTCB), but clouds still remained over the banking sector.
Analysts warned that market fears over the asset qualities of other major Japanese banks would persist even after ailing LTCB was removed from the picture.
Eleven major banks announced vast hidden losses on securities holdings - a major source of concern for their already shaky balance sheets.
Fuji Bank disclosed the biggest loss of 580.5 billion yen (£3.2 billion) at the end of September, and Sakura Bank the second-biggest at 498.5 billion yen at the end of September.
Tokyo-based LTCB, which once helped a struggling nation emerge from the ashes of war, will become the first Japanese bank to be put under state control under a set of financial revitalisation laws which took effect yesterday.
LTCB filed the application with the Prime Minister, Mr Keizo Obuchi, citing as its reason the possibility of a situation in the future where it would have to halt repayments of deposits.
Mr Obuchi accepted the LTCB request while appointing Mr Hakuo Yanagisawa as new state minister in charge of financial rehabilitation.
"The government will protect the depositors and will do everything it can to ensure the stability of financial markets," Mr Obuchi said in a statement.
The move was greeted by authorities as a first step towards a long-awaited recovery for the banking sector, blamed as the root cause of Japan's longest and deepest post-war economic slump.
"It means that a worry for the financial system has been removed and that is good for the Japanese economy," senior finance ministry official, Mr Haruhiko Kuroda said.
Japan's Financial Supervisory Agency (FSA) announced that LTCB's overall unrealised losses stood at 500 billion yen at the end of September, much bigger than its net worth of 160 billion yen.
Under the law that took effect yesterday, the government can nationalise a failed or failing bank by making a forced purchase of all of its common shares regardless of any protest from shareholders who disagree with the price it sets.
