"We cannot trigger a financial depression originating in Japan, " PM Keizo Obuchi told the lower houe budget committee. The plan agreed "was not solely for rescuing the Long Term Credit Bank."

And he denied that the bank was insolvent, worries raised by the opposition because the government refused to reveal the results of itsfinancial inspection of the bank.

Rescue plan

The long-awaited rescue plan for the bad loan-saddled Long-Term Credit Bank of Japan (LTCB) was announced on Friday.

The plan agreed by the government and the bank involves massive bad-loan write-offs, a government cash bail-out and the resignation of directors and senior executives.

LTCB said a planned merger with Sumitomo Trust and Banking Corporation is expected to be agreed by September.

$3.5bn public funds

The restructuring plan for LTCB involves a request by LTCB for ¥500bn ($3.5bn) from the government's financial system protection funds.

In return, LTCB will write-off ¥750bn ($5.2bn) in problem loans this half-year. Furthermore, the bank's president, Katsunobu Ohnogi, and the entire board will resign, and former LTCB management have to return their retirement allowances.

In addition, the bank is to withdraw from all foreign operations, speed up a 20% cut in staff and sell its plush headquarters.

Senior executives have agreed to take on average a 45% pay-cut.

The write-offs include ¥520bn ($3.6bn) in credits owed to it by non-bank subsidiary companies. Other firms will be urged to forgive part of, or cut interest on, loans extended to those subsidiaries.

Massive profit turnaround

The bank has also announced a ¥685bn ($4.75bn) half-year loss, compared to a forecast ¥20bn ($140m) profit.

It has been speculated for some time that the Japanese government would step in with public funds to cover the $10bn bad-loan exposure of LTCB so it could proceed with a merger with Sumitomo.

Prime minister Obuchi confirms merger talks

The funding plan had been consistently denied by the government. As late as last Tuesday prime minister Keizo Obuchi had said there would be no public bail-out.

The fate of the LTCB, one of the country's biggest and hardest hit banks, is being seen as a test of the government's will in coming to terms with the banking crisis.

Some analysts believe a Sumitomo merger is the only move that could save the LTCB from a collapse that would severely test Japan's ailing banking sector.

The International Monetary Fund (IMF) and foreign bankers and economists have been calling for decisive government action to force banks to tackle the ¥87 trillion ($621bn) mountain of bad loans overhanging the sector.