Some of the borrowing is earmarked for the country's bombed-out banking sector, which is finally being put to the sword by Financial Services Minister Heizo Takenaka, who in his new role as chief banking regulator is applying stiff new rules to bank accounting. Against stiff resistance, he is still planning to force changes in accounting methods so that banks can no longer count deferred tax credits as part of core capital, and will lean on banks to adopt discounted cash flow valuation of loans, exposing many loan books as hollow.

The government says that the nation's banks have more than 40 trillion yen in bad debts, but private sector estimates of the amount range as high as 100 trillion yen.

Mr Takenaka welcomed news of restructuring plans by UFJ Bank and Sumitomo Mitsui Financial Group: "It is difficult to evaluate some of the restructuring plans released recently over the short term but I take recent developments positively," he said. "I would like banks to continue [restructuring] in line with the government's financial revival plan," he said.

On Saturday, Mr Takenaka said Japan's top priority next year would be ending the persistent price declines hobbling its economy, after figures were released showing that consumer prices fell last month for the 38th month in a row by 0.8%. He told an Osaka business symposium the key issue was that the Bank of Japan had not yet spelt out how it planned to tackle deflation. Mr Takenaka said the government had now clarified its fiscal policy and was now hoping for a matching monetary policy. This may involve replacement of the current head of the Bank of Japan, whose term expires in March, and who is widely seen as ineffective.

Japanese Prime Minister Junichiro Koizumi said at the weekend that Japan had been hurt by the strength of the yen: "It is a fact that a strong yen has damaged the Japanese economy, in a sense," he said, but added that he was optimistic. "September earnings reports show that companies are posting better results so I want people to be more confident. It's not good to be too pessimistic," he said. "There were views that the Japanese economy would post no growth in fiscal 2002 but it actually grew by 0.9 per cent."