The Japanese Government is poised to resume public fund injections for the country’s sprawling regional banks sector — an emergency stabilisation gambit last used when Japan’s financial crisis blew up a decade ago.

The surprise proposal to resurrect the fund injection law, once used to pump nearly $300 billion into Japan’s crisis-hit banks, dashes hopes that Japan’s financial groups might be immune to the meltdown in the US and Europe.

Credit rating agencies are also giving warning that the recent plunge in Japanese stock markets creates a new layer of risk for the country’s banks: even after Tuesday’s record 14.2 per cent surge in Tokyo shares, the benchmark Topix index remains close to levels where the banks face heavy paper losses on their vast stock portfolios.

The plan to revive the law, which was announced today by Shoichi Nakagawa, the Finance Minister, comes amid rising fears that some small Japanese financial institutions could face severe distress or even collapse unless they are bailed out by the state purse. Many are viewed as highly vulnerable to Japan’s faltering economic situation and will suffer badly as it deteriorates further.

Mr Nakagawa also proposed a total freeze on the sale of bank stocks by the Government – the unwinding of all the banking shares that the state amassed during Japan’s last financial crisis when it undertook the same nationalisation schemes currently being used to save the British banking sector.

Recent moves by the Japanese banks to buy or plunge money into distressed Wall Street groups created the impression that they were in much better shape than they are, say analysts. Some now believe that plunging stock portfolios and the wider risks of deep global recession could prompt a string of profit warnings from the big banks in coming weeks.

Japanese banks with lower capital adequacy ratios and larger investments in the more “bubbly” side of the real estate sector are viewed as particularly vulnerable, though some analysts believe that even the nation’s largest megabanks face looming problems because of their direct exposure to the stock markets.

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