Banks had made practically no provisions against loans to Mycal, a big supermarket chain, before it went bust last month.

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But the collapse of Mycal, a big employer with once-powerful friends, is a sign that the system is under awful stress.

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The reluctance to spend has led to several bankruptcies among big retailers such as Mycal, while supermarket Daiei has been seeking new funding to stay afloat.

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Although Mycal's credit rating had fallen sharply, fund managers at Meiji Dresdner, believing that creditor banks would bail out the retailer, had failed to reduce their Mycal holdings.

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Provisions for loans to Mycal were less than 15%.

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Little more than a year ago, five-year Japanese corporate bonds rated BB (ie, junk) by Moody's yielded 360bps more than government bonds, a level they had reached after investors had been reminded of borrowers' fragility by the bankruptcy of Mycal, a big retailer.

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