For all practical purposes, big banks in Japan have turned the corner in their efforts to clean up their bad loans. For small and medium-size banks, though, no light is yet visible at the end of the tunnel. With caps on deposit insurance due to be fully reinstated next April, smaller lenders have no choice but to speed up bad-debt disposal and put their financial house in order.

The government is now ready to help these smaller banks, including regional banks and credit unions. Assistance is available under a new law that calls for preventive bailouts of ailing banks to support restructuring measures such as mergers and reorganizations. The law, which took effect last month, is intended to serve as a safety net for regional and community banks. Prevention is better than cure, as the saying goes.

Local lenders and businesses, especially small ones, are bound tightly not only by geography but also by a shared sense of destiny. Community-based businesses are trying hard to survive amid persistent deflation, but their chances of survival will diminish, or even disappear, if troubled lenders are forced to cut off credit supplies.