"I think all the weak links in Japan's financial system will be cleared by the end of fiscal 1998 (ending on March 31)," Eisuke Sakakibara, vice finance minister for international affairs, told a press luncheon.

He said Japanese bank restructuring will proceed very aggressively in the coming months because of an independent and tough regulator -- the newly created Financial Supervisory Agency (FSA) -- which has so far put two of the nation's 19 major banks under state control.

Sakakibara's view echoed the basic policy released on Wednesday by the government's Financial Revitalisation Commission, which urged Japanese banks to speed up restructuring efforts and solve their bad-debt problems by the end of March.

Under the Commission's operating policy, banks that fail to sufficiently restructuretheir operations and rationalise management will not receive public funds, while those with bold streamlining plans will be given more funds at better terms.

Apparently mindful of the badly needed cash, Japan's major banks have announced a spate of business restructurings through active mergers and tie-ups.

Earlier this week, Mitsui Trust & Banking Co and Chuo Trust & Banking Co said they have started discussions to merge in 2000, while Sanwa Bank said it was considering merging with Toyo Trust & Banking Co. Fuji Bank separately said it was thinking of taking over troubled Yasuda Trust & Banking.

Economic Planning Agency minister Taichi Sakaiya hailed the consolidation in the financial industry on Friday, saying the pace had accelerated since December.

Structural reform was finally beginning to be tackled in the public and private sectors, Sakaiya added.

Sakakibara also highlighted the changes in the banking industry, saying there would be "major withdrawals" of Japanese banks from internationalmarkets.

But he said Japanese banks were now returning to Asia, in particular to South Korea and Thailand. It appeared as though Japanese banks would be concentrating their business in Asia instead of aiming to have branches all around the world, Sakakibara added.

Addressing its banking sector mess has long been seen as key to Japan pulling its economy out of a prolonged recession. US Federal Reserve chairman Alan Greenspan on Wednesday singled out reforms in Japan's ailing financial sector and said this was essential for the economy to return to vigorous growth.

Sakakibara remained bullish on Japan's economy while warning about the high-flying US stock market.

"The Japanese economy will rebound, as I've been predicting, in the middle of 1999," Sakakibara said. He added that there was a possibility that the US equity market was overvalued, a concern that Greenspan had expressed.

In an encouraging sign, the Economic Planning Agency (EPA) said Japan's diffusion index of leading economic indicators was66.7 on a scale of 100 in November, revised up from a preliminary 57.1.

EPA vice minister Takafusa Shioya said on Friday that at the moment he believes it is likely that Japan's gross domestic product for October-December will show growth from the previous quarter.

"At the moment, there is a strong possibility that it will be a slightly positive figure," he said, adding that he expected private consumption as well as public-sector investment to have shown growth in the October-December period.

Japan's GDP in real terms posted a fourth consecutive quarter of negative growth up to the July-September quarter of 1998. Prime Minister Keizo Obuchi has pledged to the nation and to trading partners that he will lead Japan out of its sorry state, targeting 0.5 per cent growth for the next fiscal year.

Obuchi, whose ruling Liberal Democratic Party has formed a new coalition with the Liberal Party in order to get closer to a majority in parliament's upper chamber, still needs to bring more opposition partiesinto the LDP's fold in order to pass key budget bills for fiscal 1999-2000.

His prospects became more cloudy on Friday, when two of the largest opposition parties appeared to be discussing a possible alliance to combat the coalition government.