Steps to accelerate deregulation and strengthen the banking sector will be needed to boost the economy in the coming months, the Bank of Japan said Friday in a paper to be published in its monthly report for June.

The economic events of fiscal 1997 — when a gradual trend toward recovery was broken last fall by a series of financial collapses and turmoil in Asian markets — underlined the need for policies that will nurture public and market confidence, the central bank said.

In the paper, the bank said the most pressing matter is to prevent a deflationary spiral, adding that it will keep an eye on positive effects of the government’s 16 trillion yen economic stimulus package. It also pointed to the need for financial sector reform, especially in the disposal of nonperforming loans, deregulation and tax system restructuring.

One of the key reasons behind the deceleration of the economy in the latter half of 1997 was a decline in household confidence leading to reduced consumer spending, the paper says.

To reduce fears over future economic burdens, the government, while moving to improve the effectiveness in the public sector, needs to secure a public consensus on social welfare reform, the report says.

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