INTERNATIONAL BUSINESS : Japanese Ministry Takes Step Toward Tackling Bad Loans : Finance: Panel urges study of temporarily using public funds to cope with crisis. Analysts say more tough debate needed.

Japan on Wednesday took a step toward tackling a multibillion-dollar problem of bad loans that is weighing on its economy and raising fears of financial crisis.

Analysts welcomed a key advisory panel’s report to the finance minister. But they said more tough debate is needed on contentious issues such as how and when to use taxpayer money and how to resolve the problem of housing loan companies’ huge bad loans.

The panel made wide-ranging proposals, including urging the study of using public funds on a temporary basis to cope with financial failures.

It also recommended the urgent study of whether to create a body to dispose of bad loans at ailing housing loan companies--one of the stickiest problems confronting authorities.

Worries about Japan’s financial system were rekindled this week when Daiwa Bank, one of the top 10 commercial banks, said its New York branch experienced $1.1 billion in hidden losses on unauthorized bond deals in the past decade.

This followed a string of financial failures, including Japan’s first postwar bank collapse last month, which badly damaged Japanese banks’ image and credit ratings abroad.

“I think it’s an important policy statement--it shows clearly that the finance ministry intends to move toward a market discipline system,” said Alicia Ogawa, an analyst at Salomon Bros. Asia.

“But how we’re going to get from here to there, we don’t know. It doesn’t really say under what circumstances [public funds will be used], or how much or who will pay.”

The panel said the housing loan sector’s problem loans--estimated at $83.8 billion--had come to symbolize Japan’s entire bad-loan problem, officially estimated to be at least $404 billion.

A solution to the housing firm problem has become mired in a heated dispute among financial institutions, including big banks, which set up the firms in the 1970s, and agricultural institutions, which lent heavily to them, over who should bear the pain of writing off the bad loans.

The best the panel could do was urge involved parties to thrash out a compromise and offer them the authorities to help them do so.

“This problem should basically be solved by the parties involved. However, if it is difficult for them to reach agreement, authorities should help them reach an agreement,” panel chairman Ryuichiro Tachi said without elaborating.

Getting an agreement will be tough.

“While public support for agricultural institutions and the reorganization of housing loan firms is needed, it will not be easy to achieve political compromise on the issue,” said Yoshinobu Yamada, an analyst at Merrill Lynch Japan.

But he added, “Pressure is expected to grow on members of Parliament, as a general election is expected next year.”

Analysts welcomed the report’s statement that Japan’s deposit insurance system--which it said should be strengthened--would be used to protect depositors at failed institutions but not to rescue shareholders, management, investors or staff. “It’s a sign they are not going to coddle anyone,” Ogawa said.

Another key point in the report is a proposal for strong official steps to remedy financial institutions’ problems and allow financial failures to be dealt with quickly.

Finance Minister Masayoshi Takemura said legal changes needed to achieve that will be put to the next regular session of Parliament, which is expected to begin in January.

He also endorsed a proposal to raise the premium the institutions pay to the Deposit Insurance Corp. of Japan, which protects depositors, and to consider extra deposit insurance from private-sector institutions for the next five years.

“The report clarified what steps authorities will take to regulate financial institutions and guard against failures, but [it] has yet to come up with clear details,” Merrill’s Yamada said.