The Japanese government has decided to put a state-backed turnaround body in charge of the revitalisation of Japan Airlines, the Nikkei business daily said on Sunday, underlining the government's deeper involvement in the process.

Liabilities at JAL would exceed its assets by as much as $8.8 billion if Asia's largest airline by revenues were liquidated, a source with direct knowledge of the matter said on Friday, underscoring the depth of the problems facing the airline as it seeks aid from banks and the state to avoid bankruptcy.

The state body, the Enterprise Turnaround Initiative Corporation of Japan (ETIC), invests in and buys debt of companies with strained balance sheets and dispatches turnaround specialists to assist them in restructuring.

JAL is now set to slash its debt under the government's guidance and come up with a drastic restructuring scheme, the Nikkei said. The decision to put JAL under ETIC's supervision will be announced as early as this week, the paper said.

The ETIC, established earlier this month, will operate like an investment fund and will initially have the ability to procure up to 1.6 trillion yen ($17 billion) in state-guaranteed funding in the current fiscal year to March 2010.

No officials at the ETIC were immediately available for comment.

A task force led by turnaround specialists, which reports to Transport Minister Seiji Maehara, has been seeking a bridge loan of about 180 billion yen and a total capital boost of 300 billion yen from both the government and the private sector, the source said.

The government, working with the ETIC, will look into a new and more in-depth turnaround scheme for the airline, while paying heed to the task force's existing plans, the Nikkei said.

JAL is headed for its fourth annual loss in five years, weighed down by roughly $15 billion in debt and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways Co.

($1 = 92.04 Yen)

(Reporting by Kiyoshi Takenaka; Editing by Sugita Katyal)

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