Sounding almost alarmist in an interview with The Associated Press, Yoshimi Watanabe used unusually blunt language to warn that drastic action was needed to address the crisis that has battered global markets.
"If there is a big hole in the bottom of the tub, no matter how much hot water you keep adding, you will never have enough hot water," said Watanabe.
Fixing the leak requires "an overall package, including monetary policy and public money," he said.
As the subprime fallout grows, the idea of a public bailout isn't sounding as far-fetched as it once did.
In an interview with The Wall Street Journal last month, Senator Hillary Clinton, a candidate for the U.S. Democratic presidential nomination, said the U.S. government should be ready to buy troubled mortgages from investors and avoid a prolonged slowdown.
"We might be drifting into a Japanese-like situation," she was quoted as saying.
Last month, the U.S. resorted to a public bailout of sorts for Bear Stearns. The Federal Reserve allowed JPMorgan Chase & Co. to borrow from the Fed, and provide that funding to Bear Stearns. Fed officials said the procedure dates back to the Great Depression of the 1930s but has rarely been used since then.
But Watanabe said the looming global credit crisis, which started with the subprime mortgage woes that surfaced last year, was the biggest financial dilemma for the world, and Japan, since the 1930s.
Watanabe, head of the Financial Services Agency, said Japan has a lesson to share with the rest of the world in how it dealt with the bad debt problems of the 1990s - and that the U.S. can learn from Japan's mistakes.
Japan acted too late, procrastinating for six years in tackling the piles of bad debts major banks had racked up during the excessive "bubble economy" years.
After wasting stimulus packages and other halfhearted efforts, Japan was forced to resort to billions of dollars of taxpayer money to rescue the banks, said Watanabe.