Japan's main financial reformer has welcomed plans issued by two of the country's four megabanks to cure their massive bad debts.

Heizo Takenaka, minister for economic policy and financial services, said he believed UFJ - the smallest and weakest of the big four - and Sumitomo Mitsui Banking Corp were on the right road.

UFJ said on 25 December that it would set up a new firm, backed by 100bn yen ($837m; �522m) of US investment bank Merrill Lynch's money.

The bank said this would allow it to absorb its problem loans, move staff, close branches and cut its vast equity holdings.

SMBC, meanwhile, is merging two of its group banks into one.

Spiral

Officially, the debt burden on Japan's banks is 50 trillion yen. But the figure is likely to be revised upwards shortly, and the unofficial estimate is already three or four times greater.

In the meantime, the banks are reluctant to lend, slowing down business investment and worsening the slump in domestic demand.

The news came as evidence of the fragility of Japan's recovery flooded in.

Economic data released on 27 December revealed that industrial production dropped 2.2% in November from the previous month, the third month of falls in a row.

And although unemployment shrank slightly to 5.3% in November from 5.5% the month before, that reflected people taking themselves off the job market - not finding new work.

Time for action

Mr Takenaka acknowledged that progress in sorting out the debt mountain had been slow.

"After compiling the schedule of the financial revival programme, I think the time has come to take action, in line with the schedule," Mr Takenaka said.

Soon after his appointment to the financial services job - he was already economics minister - he found himself up against powerful vested interests in the government.

The plan is still to halve the loan burden by 2005, although many think this will be impossible.

Earlier this month, the head of the Keidanren employers' organisation told a Japanese news magazine that the country's prime minister "should not promise what he can't deliver".