TOKYO (Reuters)—Japan plans to set up a government-backed insurance fund to put money into Tokyo Electric Power and pay compensation stemming from the disaster at its Fukushima Daiichi nuclear plant, the Nikkei newspaper said.

Aimed at saving Tokyo Electric from collapse, the plan would have the state initially shoulder the massive compensation costs, which the power company would then repay over several years via special dividends, the paper said.

Asia's largest utility, also known as TEPCO, has yet to determine how much it will have to pay residents and business near the Fukushima plant, who were forced to evacuate after the March 11 earthquake and tsunami caused deadly radiation leaks.

"The bottom line is, TEPCO is too big to fail," said Jason Rogers, a credit analyst at Barclays Capital in Singapore.

"But that is not to say they won't be held accountable. It's impossible to quantify the financial impact at this point, but this disaster is likely to drag on for some time."

TEPCO, which supplies roughly a third of electricity in the world's third-largest economy, had $91 billion of debt on its books before the March crisis, and has since taken on a $24 billion bank loan.

JP Morgan has estimated TEPCO could face 2 trillion yen ($23.57 billion) in compensation losses in the financial year that started this month, while Bank of America-Merrill Lynch has said the bill could reach $130 billion if the crisis continues.

TEPCO will make an initial compensation payment of 50 billion yen ($589.3 million), President Masataka Shimizu told a news conference on Friday, adding he did not know how much the final bill would be.

Facing sometimes hostile questions from reporters, Mr. Shimizu said the power company would be aggressive in cutting costs.

"We want to streamline operations with no exceptions in what we consider," he said during the conference, where he apologized and bowed.

"We are obviously thinking about pay cuts for our board and managers."

Japanese media later reported TEPCO will sell $1.2 billion worth of real estate to help pay victims. TEPCO said it was not discussing property sales for now but needed to consider it.

Government to guarantee loans

Payments could be set at about 1 million yen ($12,000) per household, with all of those living within a 19-mile radius of the plant eligible, Chief Cabinet Secretary Yukio Edano told a separate news conference on Friday.

More than 200,000 people were living in the 19-mile Fukushima exclusion zone before the disaster. TEPCO estimates about 50,000 households are eligible for the initial payments.

Mr. Edano said the government wanted to start paying some of the victims before the "Golden Week" national holidays that start on Friday, April 29.

Under the draft plan as reported by the newspaper, the government would set up the fund using loans from private banks—which it would guarantee—and surcharges on other utilities that operate nuclear plants.

The fund would handle the initial compensation payments, which TEPCO would repay over the next several years by issuing new preferred shares to the fund that will pay dividends, the paper said.

The head of the Federation of Electric Power Cos. of Japan said on Friday he was not informed of such an alternative to the existing legal framework for nuclear disaster compensation, in which other nuclear generators do not have to get involved.

"If and when we receive details (of a scheme) and its purposes, we'd like to examine and make a judgment," Makoto Yagi, who also serves as president of Kansai Electric Power Co , said at a separate news conference.

Without such government support, TEPCO would likely face having its debt rating cut to below investment grade, meaning some pension funds and other institutional investors would no longer be able to hold the utility's bonds.

What is not yet clear, however, is how much TEPCO will have to ultimately pay in compensation, which would help determine the outlook for its credit rating, said Hiroki Shibata, an analyst at Standard & Poor's Corp. in Tokyo.

"How much TEPCO will have to pay or how much other Japanese utilities will have to pay and when is still unknown," he said.

The head of Japan's life insurance industry lobby said the group would "sincerely consider" a loan request from TEPCO, if asked.

Koichiro Watanabe, who heads the group, is also president of Dai-ichi Life Insurance, one of TEPCO's largest shareholders.

Shares fall

TEPCO shares slid 6% to 469 yen ($5.53), on concern shareholders would be further squeezed by the plan. The stock has lost more than three-quarters of its value since the disaster.

Spreads on TEPCO's credit default swaps, contracts that insure debt against default, narrowed, reflecting bondholder relief at the potential of government backing.

The CDS on the utility's five-year senior debt was traded around 340 basis points on Friday, market sources said, compared with around 400 basis points a day earlier.

That put the cost of insuring $1 million of TEPCO's debt against default at $34,000, compared with $40,000 a day earlier.

Similar CDS contracts on the debt of Kansai Electric Power, Japan's second-largest electric utility, indicated insuring $1 million of its debt would cost a sliver of that at $8,000.

"This scheme would be one step forward from where we were. Until now we were not clear how TEPCO would fund the compensation for victims of the nuclear accident," said Akihito Murata, a credit analyst at Deutsch Securities.

"So in that sense this would be positive. But we have to keep in mind that how TEPCO would be funding costs to cover damages at the plant itself is a separate matter."

The new fund would also provide insurance against future nuclear disasters, charging annual premiums from TEPCO and other power companies with nuclear reactors, the Nikkei said.

The government would decide the size of TEPCO's dividend payment every year based on the state of the company's finances, the paper said.