Two senior LDP politicians agreed Tuesday that the government's full-refund guarantee for demand deposits at failed banks should be extended beyond the scheduled expiration date of March 31, 2003 "for an unspecified span of time," an LDP legislator said.

Taro Aso, chairman of the LDP Policy Research Council, and Hideyuki Aizawa, chairman of an LDP panel on steps to fight deflation, reached the agreement at a meeting in the Diet building, the legislator said on condition of anonymity.

The two Liberal Democratic Party politicians also agreed that an extension of the full-refund guarantee should apply to all types of deposit-taking financial institutions.

They apparently believe the term of the extension should be left unspecified so the full-refund guarantee can be retained as long as the banking system remains unstable.

Senior ruling coalition legislators are preparing to revise the Deposit Insurance Law to enable the extension of full-deposit protection for demand deposits during an extraordinary session of the Diet expected to convene in the fall.

On April 1, the government imposed a cap of 10 million yen per bank per depositor on refunds of time deposits at banks that collapse.

The government plans to impose a similar cap on ordinary deposits, checking accounts and other types of liquid bank savings beginning April 1, 2003. Liquid deposits are assets that can be cashed in immediately on demand.

But after seeing a massive shift in deposits following imposition of the first cap, a number of coalition legislators have begun to demand an extension of full protection for demand deposits.

The LDP's two coalition allies, the New Conservative Party and New Komeito, are also urging the government to maintain the blanket guarantee to avoid undermining the banking system.

Aso and Aizawa agreed to step up consultations within the coalition to prepare for extending the full-refund guarantee during the extraordinary Diet session in fall, the legislator said.

This will put them at odds with Prime Minister Junichiro Koizumi and his senior Cabinet aides, who have so far remained adamantly opposed to extending the full-refund guarantee in view of the national treasury's fiscal constraints.

Several small bank executives and economists have warned that imposing the refund limit on demand deposits would heighten the chances that depositors would withdraw large sums en masse, which could provoke a string of small bank failures.

Other economists say this is exactly the kind of shakeout the industry needs.