March 13 (Bloomberg) -- Japan will inject funds into three regional banks as the government seeks to bolster lending to firms struggling with plunging export orders and weakening domestic consumption.

The government will buy 100 billion yen ($1 billion) of preferred shares in North Pacific Bank Ltd., parent Sapporo Hokuyo Holdings Inc. said in a statement today. Finance Minister Kaoru Yosano said today the government will also provide 15 billion yen to Minami-Nippon Bank Ltd. and 6 billion yen to Fukuho Bank Ltd., and encourage others to accept public funds.

Japan announced plans in December to inject as much as 12 trillion yen into domestic banks to make lending easier and help stave off corporate bankruptcies. North Pacific, Minami-Nippon and Fukuho will be required to increase credit to smaller companies to meet targets set by the government, according to documents provided by the Financial Services Agency today.

“North Pacific and Minami-Nippon’s unrealized investment losses were expanding, and Fukuho’s bad loans were increasing, so the capital is beneficial,” said Masahiko Sato, an analyst at Nomura Holdings Inc. in Tokyo.

The banks will also need to shrink their securities portfolios and improve their profitability.

The preferred shares to be acquired by the government are convertible into common stock if the lenders fail to pay dividends or if they are unable to repay the funds by April 2024, according to the regulator. The government will acquire a 35 percent stake in North Pacific, 16 percent of Fukuho, and 27 percent of Minami-Nippon on a share-voting rights basis, if the banks don’t comply with the payment terms.

Share Performance

Sapporo Hokuyo gained 2.2 percent to close at 235 yen in Tokyo, while Minami-Nippon dropped 1.1 percent in Fukuoka. An 84-stock index of Japanese lenders rose 4.4 percent. The last time the government injected funds into a lender was when it bought 9 billion yen of preference shares from Fukuoka-based Howa Bank Ltd. in 2006, according to the regulator.

Japan’s smaller lenders are facing losses on investments and loans as the nation’s recession deepens and after the Nikkei 225 Stock Average fell 39 percent in the past 12 months.

The economy contracted an annualized 12.1 percent in the three months ended Dec. 31, the fastest pace since 1974. Corporate bankruptcies in the nation rose for a ninth month in February, climbing 10.4 percent from a year earlier, according to Tokyo Shoko Research Ltd. Pacific Holdings Co. collapsed this week, making it the 12th failure by a publicly traded company in Japan this year.

Kansai Urban

Sapporo Hokuyo said it expected its full-year loss to widen to 204 billion yen in the year ending March 31, compared with a previous forecast of 27.5 billion yen, as it books losses on its securities holdings.

Kansai Urban Banking Corp., a unit of Sumitomo Mitsui Financial Group Inc., forecast a loss of 25 billion yen, compared with a previous profit forecast of 6 billion yen. Osaka-based Kansai Urban and Shiga prefecture-based Biwako Bank Ltd. will merge March 1, 2010, the companies said in a joint release today.

Sumitomo Mitsui said in a separate release it will buy 20 billion yen of new shares in Kansai Urban to boost its finances.

Senshu Bank Ltd., a unit of Mitsubishi UFJ Financial Group Inc., and Bank of Ikeda Ltd. said last year they plan to merge in 2009, while Juroku Bank Ltd. and Gifu Bank Ltd. announced plans to form a capital and business alliance earlier this year.

The financial regulator said this week it will carry out unprecedented inspections of Japan’s largest banks, including Mitsubishi UFJ, to ensure they aren’t cutting off borrowers.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: March 13, 2009 04:50 EDT