Reports said the plans were backed by the Heiwa-Kaikaku parliamentary group, giving the LDP enough votes to pass the bills and get public money to the banks so that they can relaunch the economy with more loans.
Progress in the bank bills, and the pledge by Prime Minister Keizo Obuchi to inject substantial further sums into the economy, sent the Nikkei 225 stock index up 6.17 per cent to 13,825.61. The yen rose 6 per cent against the dollar to 122.6, its biggest one-day move since 1973.
The LDP's bills allow healthy banks - those with capital equal to 8 per cent of assets - to get public money when they take over failed banks or agree to merge with or absorb weaker institutions, or where "drastic and grave'' concerns exist about the state of the banking system.
This final point is one reason why the main opposition party, the Democratic Party, remains opposed to the LDP bills. The party's leader, Naoto Kan, called it "a half-baked plan that could lead to an even worse credit crunch".
In February, Japan set aside 13 trillion yen to boost the capital of solvent banks, but opposition parties demanded last month that the fund be abolished and replaced with one carrying stricter controls. The new plan agrees to consider tougher accounting and disclosure standards, and would make available 10 trillion yen to be used by 31 March 1999.
Once the banking system stabilises, banks will be obliged to disclose stockholdings based on the current market price or the purchase price, whichever is lower.
Under the present bank law, loans are divided into four categories based on their risk level, with category one being the safest. The proposed bill mandates that lenders subdivide category two loans, allowing more precision in assessing a bank's health.
The LDP also proposed that the government set criteria of loan-loss reserves for category three problem loans - those with little possibility of recovery - and category four loans, deemed irrecoverable.
Japan is under pressure from the rest of the world for quick and resolute action on its banks, which is seen as the key to stabilising the nation's debt-laden banks and helping to halt the slide in the world's second-biggest economy.
The Group of Seven (G7) industrial powers said at the weekend that it was vital for Japan to take "swift and effective action to strengthen the financial system, including prompt enactment of measures to support viable banks with public assistance of sufficient amounts".
The governor of the Bank of Japan, Masaru Hayami, told parliament that with banks in their weak state, "we can only hope for large-scale capital procurement from the public sector". But he disputed reports that he had told US officials that capital at the top 19 banks had "dwindled to dangerously low levels".