It ended months of political wrangling and means taxpayers' money will be used to prop up weak but solvent banks.

Thanks to extravagant lending in the speculative bubble economy of the late 1980s, Japanese banks are now weighed down with huge bad loans and some are on the verge of collapse.

International pressure has mounted on Japan to deal with the problem and Tokyo's stock market has sunk close to 13 year lows in the past two months as lawmakers haggled over details.

Japan's Prime Minister Keizo Obuchi said: "My feelings? We have accomplished major objectives. My responsibility gets heavier."

Bank support crucial

Under the new reforms insolvent banks will be put under government control and their bad loans sold off.

Private buyers will be found to take over the remaining healthy operations, supported with an ¥18 trillion fund of taxpayers' money.

Governor of the Bank of Japan, Masaru Hayami, has urged banks to accept funds

The first candidate will be Long-Term Credit Bank of Japan, which virtually folded in June.

The bank's stock hit a record low of just three yen on Friday, before closing at four yen.

The main problem with the scheme is the way it deals with banks which are technically solvent but still have low capital levels.

These banks will be expected to ask for money from a ¥25 trillion pool, although critics, including some government ministers, say they should be forced to take the cash.

Economists warn there is little incentive for bank chiefs to ask for the large sums of money they really need since many would have to resign as a result.

The banks would also be forced to spend their profits clearing out bad loans.

However Finance Minister Kiichi Miyazawa urged: "I want leading banks to respond positively."

James Fiorillo, senior analyst at ING Barings Japan said: "Even with a banking fix, Japan may need three or more years to get back on the recovery track.

"The success of the banking rescue package now on the table in Japan critically depends on whether banks support the plan."