TOKYO -- Japan's government put its long-awaited bank bailout plan into action Friday by taking over one of the country's biggest lenders, the debt-ridden Long-Term Credit Bank of Japan.
The takeover -- the first nationalization of a Japanese bank since World War II -- avoided a full-scale collapse of LTCB, which would have further eroded confidence in Japan's banking system and shaken world markets.
The government took over the bank under a recently approved set of laws aimed at revitalizing the financial system and lifting Japan out of its worst recession in half a century.
The laws, which went into effect Friday, also open the way for $515 billion in public money to be spent shoring up the banking industry. The government can use the money to bail out weak banks or help healthy ones rid themselves of a crushing burden of bad loans.
Estimates of the size of Japan's bad-loan problem run as high as $1 trillion, much of it left over from the collapse of Japan's high-flying speculative "bubble economy" of the 1980s.
In announcing the move, Prime Minister Keizo Obuchi sought to assure the bank's jittery clients and customers -- and international markets.
"The government will continue to take all possible measures to protect depositors and others, to maintain an orderly financial system, and to stabilize financial markets at home and abroad," Obuchi said.
The takeover was seen as a clear signal that Tokyo is at last willing to end the so-called convoy system, where the government offered unconditional protection to weak banks, and begin allowing market forces to sift out winners and losers.
"We wanted to see if the government would be willing to close down non-viable banks," said James Fiorillo, a senior analyst at ING Baring Securities in Tokyo.
One group that stood to suffer was LTCB's shareholders. The stock last traded at 2 yen (2 cents). Though the government would have to buy the shares as part of the nationalization plan, they were expected to pay only about 1 yen (1 cent).
Japan's taxpayers, who will now have to pick up the tab for the bank's bad loans, also stood to lose. Government auditors said Friday that as much as $39.8 billion of LTCB's loans may be irrecoverable.
LTCB issued an apology and said all of its directors would resign once the government had appointed new managers.
The government didn't say what was in store for the bank in the long run but the takeover seemed likely to spell the end of LTCB's 46-year history.
Founded in the aftermath of Japan's military defeat to provide cheap, long-term loans to industry, the bank helped lead the country's spectacular rise to economic superpower status.
But like the U.S. savings and loan industry a decade ago, changes in regulations and the economy made specialized lenders like LTCB obsolete. Desperate for new customers, the bank increasingly lent to riskier enterprises such as real estate developers until property prices crashed in the 1990s.
The most likely outcome for the bank, said analysts, would be for the government to keep control for one year while its bad loans are sold and another company is found to absorb its healthy operations.
Also Friday, Moody's Investors Service placed the creditworthiness of four major Japanese lenders, including top-ranked Bank of Tokyo-Mitsubishi Ltd., under review for possible downgrades.
Moody's said the move was prompted by heightened concerns over the banks' exposure to economic problems in Japan and other Asian nations, higher borrowing costs overseas and declines in the value of their stockholdings. It also cited worries about potential undisclosed losses at subsidiaries and affiliates of the banks.
The action also targeted the Industrial Bank of Japan Ltd., Sanwa Bank Ltd. and Sumitomo Bank Ltd.