TOKYO, May 21 (AFP) - Japan on Friday proposed creating a new free trade area in Northeast Asia to rival strong economic blocs elsewhere. Northeast Asia, including Japan, Hong Kong, South Korea and Taiwan, is "the world's only area lacking a tendency toward regional integration," the ministry of international trade and industry said in its annual report. "We should not only pursue a limited economic grouping, such as a free trade zone or tariff pact, but also activate human exchanges and promote mutual understanding in the region," the report said. "It is important to steadily promote a mechanism that will economically help us to establish a new ara," said the report, submitted to Prime Minister Keizo Obuchi. The proposal was designed to counter other economic groupings, such as the North American Free Trade Agreement, which was enjoying trade and investment growth within itself. The report said some 90 percent of the 134 members of the World Trade Organisation (WTO) were under some form of economic bloc umbrella. "Those which belong to no regional trade integration systems, such as Japan, South Korea and Hong Kong, are in a minority," it said. The report calls on Tokyo to take the initiative in forming the regional free trade zone and raised support for the global free trade system under the WTO. "Japan should aim at deepening intra-regional exchange and understanding in Northeast Asia in our effort to build a system contributing to multilateral trade," it said. The report said forming a regional trade system would expand Japan's influence on global trade negotiations. The WTO is to start a new round of global trade talks later this year. The ministry's report also stressed that financial system reforms in Asian countries were a prerequisite to a quick recovery from their economic woes. "A severe credit crunch has emerged in terms of both industrial finance and trade finance," the report said. "This is primarily because financial institutions have been forced to drain their equity capital to deal with non-performing loans blown out by the currency crisis and domestic bubble collapses. "Regular industrial financing functions need to be restored as soon as possible. It will therefore be important to reform financial systems, including capital injections and the nationalisation of failed financial institutions," said the report. Japan's economic recovery from its worst post-war recession is another factor to halt Asia's financial crisis. "If the Asian economies are to stage an early export-led recovery and achieve coherent economic development again ... the Japanese economy must break out of the current recession as soon as possible, re-establishing itself and a world front-runner," it said. "This will mean urgently addressing the revitalisation of the economy by developing the various key environmental aspects in industrial revitalisation," it said. To achieve recovery, Japan needs "measures to stimulate short-term demand, encourage new business, facilitate corprate buy-ups, mergers and reorganisation, and facilitate labour mobility," it added.  