PARIS South Korea's economy which slowed sharply due to falling exports and weak demand at the end of last year, is to start growing again in the second half of this year, an OECD forecast said.

South Korean GDP growth was projected to reach 4.2 percent this year and 5.5 percent in 2002, AFP reported.

There was a sharp downturn in the fourth quarter of last year with growth down to 8.8 percent in 2000 from 10.9 percent a year earlier, said the Organization for Economic Cooperation and Development.

But the OECD said in its **** Economic Outlook***: "Emerging sings of improving business and consumer confidence suggest that the downturn may be short, with a recovery beginning in the second half of 2001."

GDP growth could rise to 5.5 percent this year if "overseas demand, notably from the U.S. economy, bounces back" in the second half, it said.

"Inflation is expected to slow to 3.5 percent in 2002," from the current rate of above four percent, it said, as the lagged impact of oil price hikes and the local currency's fall will dissipate.

The OECD said that to achieve an early recovery, South Korea must effectively address problems in the corporate and financial sectors and to limit direct government intervention.

"Potential difficulties in the restructuring of the corporate sector with negative repercussions on the financial sector, appear to be the major domestic risk to an early economic recovery."

It listed as the "key factors responsible for the downturn" last year falling overseas demand, deteriorating trade balances and problems in the process of reforming the corporate and financial sectors.

Economic reforms unveiled the fragile financial condition of many Chaebol-affiliated firms, raised the threat of bankruptcies, and prompted the flight of money away from the capital market, it said.

Japan must step up structural reforms to spur economic growth amid renewed signs of weakness in the world's second largest economy, the OECD said.

The OECD forecast anemic gross domestic product (GDP) growth of just 1.0 percent both this year and in 2002.

"After slowing during the second half of 2000, the economy has exhibited further signs of weakness," the OECD said in its **** Economic Outlook **** report.

Japan's economy is saddled with a sagging stock market, deteriorating investments and downward pressure on wages due to corporate restructuring, the OECD said. Falling exports have recently added to the weakness.

It urged Tokyo to step up its structural reforms, particularly in the nation's banking sector, which holds massive bad loans totaling at least 32 trillion yen ($260 billion) as at September last year.

"The most pressing requirement for policy is to give a clear sense of direction. This requires an acceleration of structural reforms with priority on those that would open up new business opportunities and facilitate reallocation of resources," the OECD said.

Bad loans in the financial sector have to be dealt with squarely, leading to liquidation and/or restructuring of bad loans," it said.

The Bank of Japan was urged to give full support to bringing deflation to an end.

The OECD report came a week after reform-minded Junichiro Koizumi was chosen as Japan's new prime minister.

The new premier, who took office on April 26, promised structural reforms and pledged to do what was required to drag the nation's slumping economy back to heath.