Japan’s public credit guarantee system for small and midsize companies is facing major problems, government officials said Saturday.

An increasing number of business failures, the officials said, are forcing public guarantee corporations to assume debt repayments.

Ministry of Economy, Trade and Industry officials said the system will record a deficit of 600 billion yen for the current fiscal year, which ends March 31 next year. They said the total is likely to swell to 1.5 trillion yen by the end of fiscal 2005.

The deficit cannot be offset by withdrawing a large portion of reserves from the Japan Small and Medium Enterprise Corp., a state-run corporation that oversees the system.

The government is said to have decided it needs to provide as much as 400 billion yen from public funds between fiscal 2002 and 2005. Negotiations with the Finance Ministry over the matter are scheduled to start soon.

The credit guarantee system is designed to help small companies with weak credit positions raise funds. Small companies can apply for loans at private financial entities with a guarantee from public Credit Guarantee Corporations.

Such public corporations operate at 52 sites across Japan and pay back loans when small companies fail. Most of the fund resources at the corporations consist of guarantee charges paid by small companies.

The corporations in turn pay insurance premiums to the state-run Small and Medium Enterprise Corp. This allows them to receive funds from it when they assume loan repayments for failed companies.

The huge deficit in the credit guarantee system stems from the government’s policy of providing a special guarantee for such companies. The policy was introduced in October 1998, when banks were becoming increasingly reluctant to lend to weak companies because they were being weighed down by nonperforming loans.

The special government program was discontinued at the end of March 2001. The guarantee provided under the program by that time had become worth about 30 trillion yen.

The number of failures of small companies that received the special guarantee, meanwhile, has increased amid the prolonged economic slump.

The amount of loan repayments assumed by public credit guarantee corporations swelled by 15 percent in fiscal 2001 from the year before. It stands at a record high 1.2 trillion yen, according to the ministry officials.