Nearly 20,000 firms went bankrupt in Japan during 2002, the second-highest number of corporate failures since World War II.

The danger exists that the special bank inspections... could act as a spark for a surge in bankruptcies Teikoku Databank

And experts predict that this year even more companies will go under, because the government is pushing Japanese banks to adopt stricter accounting standards.

Later this month the Financial Services Agency will begin a second round of special inspections to examine the balance sheets of the country's banks.

Firms that have little prospect of paying back their loans are likely to be cut off from further financing.

The government of Prime Minister Junichiro Koizumi has promised to halve the number of bad bank loans by March 2005. Japanese banks carry outstanding loans worth at least 50 trillion yen (�263bn, $423bn).

The Japanese Employers' Federation recently warned that it was "impossible" to meet this target.

Small firms under threat

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According to research firm Teikoku Databank, 19,458 firms called in the receivers last year. The record was set in 1984, when more than 20,800 companies went to the wall.

"The danger exists that the second round of special bank inspections... could act as a spark for a surge in bankruptcies," Teikoku Databank said.

Small and medium-sized firms are said to be especially at risk, a trend that seems to be reflected in the figures. While bankruptcy numbers are going up, the total debt left behind by failed firms is actually falling.

Politically it's still not acceptable for that many companies to go bankrupt Garry Evans, HSBC

The pressure will grow during the coming 10 weeks, as balance sheets are drawn up for the financial year ending on 31 March.

Japan's deflation - where real prices are falling - is another factor pushing firms to the brink, Teikoku analysts say. Deflation makes it impossible for struggling companies to pass rising costs on to consumers.

They are left with the choice of either going further into debt, or, if that is not an option, to go bankrupt.

Political pressure

But as Japan's economy is mired in recession and unemployment near record highs, analysts warn that the political fallout of these social costs could still scupper the proposed reforms of the financial sector.

Politicians with links to the worst-affected industries are likely to water down reform plans, said HSBC chief strategist Garry Evans: "Politically it's still deemed not to be acceptable for that many companies to go bankrupt."

The largest number of bankruptcies were in the construction sector, which traditionally has close links to the ruling Liberal Democrats.