May 16 (Bloomberg) -- Japan's government and central bank will work together to end deflation and support a recovery in the world's second-largest economy, Finance Minister Sadakazu Tanigaki told Asian counterparts in Jeju, South Korea.

``As our economy remains in a mild deflationary phase, it is essential that the government and the Bank of Japan will continue to work together to take effective and comprehensive measures to overcome this deflation,'' he said.

Japan's recovery from a third recession since 1991 is benefiting from growth in Asia, which accounts for about half of its trade, Tanigaki said in a speech at the annual meeting of the Asian Development Bank.

Exports by companies including Canon Inc. and Sharp Corp. accounted for about a quarter of Japan's annual 6.4 percent pace of economic growth in the fourth quarter, the fastest in 13 years. Exports to China grew 33 percent last year to a record 6.63 trillion yen ($58 billion), accounting for about 12 percent of total overseas shipments.

``Asian economies, with China and India in the lead, continue to enjoy high growth,'' supported by exports and consumer spending, Tanigaki said. ``In Japan we are now witnessing positive signs of private sector-led recovery.''

Non-government demand is showing signs of recovery, Tanigaki said. In the past, Japan has depended government spending to fuel growth.

Bad Loans

Economic growth is helping Japan reduce bad loans choking the banking system. Japan's 129 nationwide and regional banks had 31.6 trillion yen of bad loans as of Sept. 30, a 10.5 percent decline compared with the previous six months, according to the Financial Services Agency.

``Structural problems that once burdened our economy -- such as non-performing loans -- have started to recede,'' Tanigaki said.

The Bank of Japan has sought to fight six years of falling prices by keeping its key interest rate near zero and pumping trillions of yen into the banking system.

The Organization for Economic Cooperation and Development last week said Japanese consumer prices may rise 0.1 percent in 2005, which would be the first annual increase since 1998, and the smallest pace of decline since then. It also said Japan's economy will grow 3 percent this year, almost double the forecast it made in November.

Economies in Asia excluding Japan grew 6.3 percent in 2003, the Asian Development Bank said last month, more than the 5.3 percent the bank had forecast. Japan's economy grew 2.7 percent in 2003, after averaging 1 percent in the previous 10 years, with business spending accounting for about half of the growth.

To contact the reporter on this story: Daisuke Takato in Tokyo at dtakato@bloomberg.net

Last Updated: May 15, 2004 20:57 EDT