The solution may be in bankruptcy laws.

"The Japanese economy won't be growing much on average in the long term, so there are going to be many occasions in the economic cycle where bad-loan levels will rise, "Keiichiro Kobayashi, a fellow at the Research Institute of Economy, Trade and Industry, told Reuters in a recent interview.

"To get rid of these bad loans quickly, it's important to have bankruptcy laws that can be easily implemented," he said.

Japanese companies have long avoided bankruptcies since the process of seeking court protection from creditors while attempts are made to revive them is traditionally lengthy, with businesses often unable to avoid halting operations and laying off workers.

A law in 2001 and an amendment last April to the corporate rehabilitation law aimed to address such concerns, allowing troubled firms to stay in business under existing management.

The hope was to wean weak firms off bank support and have them undergo rigorous restructuring insisted on by creditors.

But Kobayashi admitted that the changes had yet to catch on in a big way. "It's going to take a long time. We're talking about changing a culture," he said.

Kobayashi said even with what is seen as Japan's best economic growth in 13 years, banks may take several more years to clear up their bad loans mess.

"Worries that major banks will collapse and start a panic are gone but many regional banks are still struggling with problems," he said.

"If banks continue to get rid of bad loans as they're done under government pressure, problems in the financial sector including those at regional banks can be resolved in three to four years."