TOKYO (AP) _ Japan's financial watchdog Thursday intensified pressure on major banks to reassess their bad loans using tougher Western-style accounting rules _ a step that could sharply increase the size of the debt crippling the banking sector.

The Financial Services Agency said it would ask, but wouldn't require, the five largest banks to adopt a method known as discounted cash flow to calculate their bad loans by the March 31 end of this fiscal year.

The method would force many banks to lower the value of their loans and other assets now valued according to potential returns. It could also expose more sour loans.

Under new bank minister Heizo Takenaka, the government has been trying to rid the banks of a mountain of debt that has strangled the world's second-largest economy. Economists say Japan must resolve banks' bad debts before it can recover from a decade-long slowdown.

Takenaka's initial threats to nationalize shaky banks sent shivers through Tokyo markets and drew protests from the banks. But he later agreed to watered-down measures and banks have doubled efforts to boost capital and shed bad loans.

Akio Okuyama, who heads the Japanese Institute of Certified Public Accountants, said banks are already making the transition to the new accounting methods. He said banks would be forced to more accurately report bad loans.

But critics say the accounting changes won't accelerate the bad loan write-offs and could prompt some banks to cut lending to small and medium-sized businesses.

The government estimates the nation's banks have more than 40 trillion yen (US$333 billion) in bad debt, but analysts in the private sector say the amount could be as high as three times that.

Many Japanese banks classify deadbeat corporate borrowers as low-risk up until the day the companies go bust. Despite annual write-offs, their debts have continued to pile up as lean times have sent Tokyo's stock market tumbling to near 19-year lows and corporate bankruptcies soaring.

The FSA said it is mainly targeting the four megabanks _ Mizuho Holdings, UFJ Holdings, Sumitomo Mitsui Financial Group and Mitsubishi Tokyo Financial Group _ and Resona Holdings, and wouldn't press smaller and regional banks to follow suit.

Only Mitsubishi Tokyo, considered the strongest bank, already uses discounted cash-flow accounting.