TOKYO Japan's economy is crumbling fast amid slack demand and falling prices, and will slump further as the government implements drastic structural reforms, Bank of Japan (BOJ) Governor Masaru Hayami said Monday.

"The economic deterioration is extensive, including a fall in exports and capital expenditure, as well as weak private consumption. Under these circumstances, prices will continue to be in a falling trend," Hayami said in speech to a quarterly meeting of BOJ regional managers.

Prices would continue to slide, as dire economic conditions forced companies to cut more jobs, pushing the unemployment rate higher. This would further dampen consumer sentiment, pressuring prices in a vicious cycle, he said.

A raft of structural reforms, advocated by the government to lift the nation out of recession, would further hurt the economy in the short term, AFP quoted Hayami as saying.

"The most important policy issue is that we should not lead (these economic pressures) to cause a deflationary spiral," he said.

Japanese banks, weighed down by a mountain of bad loans, must clean up their accounts to regain financial health, he said adding the Central Bank is already providing enough liquidity to the markets in case the financial system is destablized by the process of bad debt write-offs.