A new law intended to strengthen the nation's financial system by allowing the government to inject public funds into financial institutions in a preventive manner took effect Sunday.

The legislation, chiefly targeting regional lenders, makes it possible for the government to conduct a preventive public fund injection even if financial institutions are solvent.

This is an enhanced step from the previous system that allowed such injections only to avert a financial meltdown after the collapse of certain banks.

Under the new law, financial institutions including regional banks and community-based credit associations can apply for public funds by March 31, 2008.

The government will infuse public money into such institutions only when they meet the requirements set by the government in their management improvement plans.

The law stipulates preferential measures be accorded to lenders if their management improvement plans involve drastic organizational restructuring.

Such measures include immunity from being pursued in terms of management responsibility for failure to achieve numerical targets set in the plans.

This clause is expected to encourage mergers among regional financial institutions.

The government set a ceiling of 2 trillion yen in taxpayer money in the fiscal 2004 budget to help capital-short lenders accelerate the disposal of bad loans and even merge with others to boost competitiveness.

The legislation, which the Diet enacted in June, was initially scheduled to take effect Sept. 1.

But the government front-loaded its enforcement, given that some financial institutions may consider applying for public funds in the course of compiling earnings reports for the April-September first half of the current business year.