The House of Representatives approved a bill Friday that would allow the government to funnel taxpayer money into financial institutions even if they are not insolvent.
The bill, which went to the House of Councilors for action, is designed to prompt capital-short regional and community-based banks to accelerate the disposal of their bad loans and merge with other lenders to boost competitiveness.
Under the current system, the government can use public funds only to avert a possible financial meltdown only after the collapse of certain banks.
The Financial Services Agency plans to use the legislation to order regional banks to promote restructuring, improve their business models and strengthen governance toward the ultimate goal of revitalizing regional economies.
Ensuring the financial health of regional lenders is a pressing task for the FSA. Next April, the government plans to scrap full-refund guarantees on demand deposits, a move likely to prompt worried depositors to shift their savings away from weak banks.
Unlike the decline of bad loans at major banks, many of Japan's 600 regional financial institutions are apparently having trouble keeping their heads above water, weighed down by heavy bad-loan holdings and slumping local economies.