A recent nationwide flurry of collapsing credit unions and "shinkin" credit associations was accompanied by a total lack of panic.

In Tochigi Prefecture, which saw the failure of four credit unions and Utsunomiya Shinkin Bank, there were no lines of customers screaming for their deposits.

"We expected worse, much worse," said Hiroyuki Ogaki, an official of the business advisory section at the Utsunomiya Chamber of Commerce and Industry.

The collapses are considered part of a last-minute cleanup of the local banking system before the business year ends March 31. But despite talk of a financial crisis in the coming months, the public remains eerily calm. It apparently believes that in a pinch, the government can and will bail out the banking system.

However, alarm bells are ringing loudly. Once again, the government is preparing to prop up banks and put off real reform, pundits fear.

"A banking system struggling to rid itself of bad and risky loans can exert a tremendous drag on the real economy," U.S. Treasury Secretary Paul O'Neill said last week. O'Neill also offered some advice: that Prime Minister Junichiro Koizumi's administration should deal with the problem to the "full extent, rather than through a series of partial measures designed to minimize the immediate cost."

While O'Neill's words came thinly cloaked in diplomacy, economists have been getting right to the point.

"Japan's banks are technically insolvent," Michael Petit, Standard & Poor's chief credit officer for the Asia-Pacific region, said in a recent talk.

Said Hirofumi Inagawa, chief operating officer of Fisco Web, an Internet-based financial consulting firm: "If banks realized their losses on all their actual problem loans, the entire Japanese banking system would need to be nationalized, or given a lot more money."

Financial Services Agency officials are working overtime to polish the banking system's facade before banks close their books March 31. Koizumi's administration is under pressure to show progress in getting to the bottom of problem loans by then.

After March 31, the government plans to lift its blanket protection on time deposits and limit coverage thereafter to 10 million yen plus interest per depositor. The plan has prompted depositors to move money away from banks' with questionable financial health -- outstanding deposits at tier-one regional banks are shrinking while they are surging at the largest city banks.

With March 31 approaching, credit ratings agency Moody's last week gave Japan's largest banks negative outlooks. Depositors can protect their money by moving their savings into cash accounts, but the guarantee on these deposits will end a year later.

Ratings agencies are now saying that a governmental bailout is almost inevitable, although a capital injection alone would not improve banks' earnings or stop loans from going bad. It would be the third large-scale capital injection of public funds following those in 1998, in which 21 banks received 1.8 trillion yen, and in 1999, when 15 banks received 7.5 trillion yen.

Most banks, large and small, are still trying to unload their nonperforming loans. According to the government's conservative estimate, the bad loans held by all deposit-taking institutions come to 43 trillion yen, or 9 percent of the nation's gross domestic product.

For the current fiscal year, the nation's 14 major banks are writing off a record 6 trillion yen in problem loans. That is three times their original target and almost double their combined operating profits.

But as quickly as banks deal with old problem loans, new ones crop up as the deepening recession strangles ailing firms, bank executives say.

Meanwhile, the banks' core capital is already padded by the preferential shares that the government "bought" with its previous cash injections.

"Banks can't take a decade's worth of hits at once," said Hideyasu Ban, bank analyst at Morgan Stanley. Losing loans after a major corporate failure "will immediately show how undercapitalized they are."

Five major banks have said they have dipped into precious capital reserves to cover losses not only from huge bad-loan writeoffs, but also from the plunging values of their shareholdings.

These include Sumitomo Mitsui Banking Corp., which will transfer 599 billion yen from its capital base to an operating account so it can pay dividends and cover 450 billion yen in stock market losses and 1 trillion yen in bad-loan writeoffs. UFJ Holdings Inc. similarly said it will use 1 trillion yen of its core capital after writing off loans to troubled Daiei Inc., the nation's second-largest retailer.

Lamented Yoshifumi Nishikawa, SMBC president: "All the capital that we have accumulated since the end of World War II is slipping through our fingers."

Faced with low credit demand and having little appetite for further risk, lending at the nations' banks fell 2.2 percent from the previous year, falling for the third year in a row. This is despite the Bank of Japan's attempts to pump money into the economy, which increased base money -- the total of currency in circulation and bank reserves -- by 16.4 percent last year.

The banking sector's current woes differ from the 1998 crisis, when talk was of crumbling banks themselves. That same year, the Long-Term Credit Bank of Japan and Nippon Credit Bank went under.

Both were nationalized and sold back to the private sector.

Now the talk is of imminent collapses in the corporate sector.

The banking woes have also hit the stock markets. On Wednesday, partly over concerns that the bad loan problem is being glossed over, the benchmark Nikkei average of 225 stocks dipped below the psychologically weighty 10,000 level for the first time since Nov. 13, to close at 9,919.48.

"Unfortunately, our forecasts on the general economic climate, the speed of newly arising problem loans, share prices and deflation all went astray," said Terunobu Maeda, slated to become president of Mizuho Holdings Inc. in April. The holding company joins Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan to form the world's largest bank in terms of assets.

"Problem loans are a factor of the state of the general economic climate," Maeda continued.

The banking group projects loan losses totaling 2 trillion yen for the year ending March 31.

"We can't expect a large improvement in the economy in fiscal 2002," Maeda said. "And an appropriate amount of reserves will need to be set aside then."

In fact, borrowers appear to be betting that banks will do just that.

Take Daiei for example. The retailer was struggling under 2.56 trillion yen in consolidated debts, but to the delight of government officials, the retailer's three largest creditors -- UFJ, Fuji Bank and SMBC -- announced a 420 billion yen bailout earlier this month.

Economists question whether Daiei can be nursed back to health through the bailout but nonetheless rationalize the prescription as the right medicine, saying Daiei was simply too big to fail.

Others also fall into this category.

In 1999, Sato Kogyo Co., a major construction firm founded in Toyama Prefecture, received partial debt forgiveness of 283.5 billion yen; its liabilities have since gone back up to 266.2 billion yen.

Since reports placed it on a list of large borrowers that financial regulators are requiring banks to take a tougher stance on, its share price has plunged to nearly 20 yen, well below its face value of 50 yen.

But Hideki Namura, senior managing director at Sato Kogyo, said he sleeps easy.

"If Sato Kogyo fails," he said, "that means that creditor Hokuriku Bank will fail. And the government is not going to let that happen."