Officials of Japan's ruling Liberal Democratic Party (LDP) met Ministry of Finance (MOF) representatives yesterday to discuss a bad loan clean-up plan, including how it would be funded.

The meeting came as Japan faces a difficult week on the economic front. Japanese share prices will come under heavy pressure this week. Brokers said yesterday that shares would be depressed by negative economic indicators later this week, with a grim Tankan business survey expected to push prices down sharply.

LDP officials said the main point of discussion at yesterday's meeting was the formation of a "bridge bank" to protect depositors in the event of bank failure, but no decision was reached.

Under a bridge bank scheme, troubled banks will come under state control so they can continue lending to sound borrowers until the banks find merger partners.

MOF officials at the meeting called for covering possible loan losses under the new scheme by using Japan's 30 trillion yen economic stimulus package, Kyodo news agency reported.

The government earlier this year made ready 30 trillion yen to stabilise the financial sector - 17 trillion yen to protect all depositors and 13 trillion to recapitalise selected banks. Only two trillion yen has been used so far.

At the meeting MOF also proposed creating a screening committee which would scrutinise the quality of the loans to be taken over by the bridge bank, Kyodo said.

If any loans become irrecoverable despite the screening, the resulting losses should be covered by the 13 trillion allocated to the government's Deposit Insurance Corp to recapitalise banks, Kyodo quoted MOF officials as saying.

LDP officials said the party's task force will meet again at 1 p.m. today, inviting officials from the newly established Financial Supervisory Agency (FSA) to attend.

Six LDP politicians, including former agriculture minister Mr Ichizo Ohara, gave their views on the bridge bank at yesterday's meeting.

"We received ideas and listened to explanations. But no decision was made," Mr Nobuteru Ishihara, a member of the LDP's committee on bad loan problems, said.

Earlier yesterday, a top LDP leader said the Prime Minister, Mr Ryutaro Hashimoto, had asked that the plan be prepared by July 2nd, a week ahead of the original schedule.

In a tentative step towards banking reform, the troubled Long-Term Credit Bank of Japan Ltd. said last Friday it had been in merger talks all week with a major trust bank.

LTCB's stock has been shredded on the market in the past month and the bank has desperately tried to arrange mergers with a string of major commercial banks until Sumitomo Trust and Banking Co. Ltd. threw a lifeline.

Meanwhile, the Bank of Japan's latest Tankan business survey is due out early today and it is widely predicted to show business confidence sliding fast.

The Tankan is a detailed survey of businesses and their plans for the months ahead and, as the central bank's most detailed source of information for planning, is regarded as the touchstone of the economy's future health.

Its headline figure, which measures the difference between firms who say the economy is improving and those who say it is worsening, could fall as far as minus 48, economists predict.

That would be the worst result for more than four years.