Washington, March 27 (Bloomberg) -- Japan should lower trade barriersand encourage banks to write down assets to strengthen growth in theworld's second-largest economy, Treasury Secretary Paul O'Neill said. Japanese banks should value assets at levels that ``can be supportedby ongoing earnings,'' O'Neill said at a conference of the NationalAssociation for Business Economics. He also said Japan should openmarkets to ``world price competition.'' In his most extensive public comments on Japan since joining the Bushadministration in January, the former Alcoa Inc. chairman encouragedthe Japanese to adopt policies that foster free trade, which he saidhelped spur innovation and propel a decade-long economic expansion inthe U.S. ``The great friend of the U.S. economy has been the competitivepressure we have felt from world prices,'' O'Neill said. ``The lesson forJapan for the last 10 years is that the idea of even a brilliantly well-planned economy can't begin to approach the wealth creation andincome creation capacity of a free market economy.'' Japan's national debt has swelled to about 130 percent of grossdomestic product, after 10 years of government spending on projects tostimulate the economy. Earlier this month the Bank of Japan said itwould guide interest rates close to zero in an effort to ward off deflationand halt an economic slide. For years, banks in Japan have used gains from shares of thecompanies they own to offset bad loans. That accounting practice willend in April when banks are required to use different methods that, forthe first time, value the holdings at market prices. The change is expected to make banks' balance sheets more accurateand over the longer term, bolster the health of the banking system. Inthe short run, it will mean a cutoff of funds to unhealthy companies,likely putting them in bankruptcy. It's a painful, but necessaryadjustment, O'Neill suggested. ``They need to write their assets down to a real carrying value,'' O'Neillsaid. The U.S. made similar changes ``on a smaller scale when wefaced up to and dealt with our saving and loan problems'' during the late1980s and early 1990s, he said. ``The Japanese problem is a larger onethan ours, but they have the same need to act.'' The changes Japan needs to make won't come easily, O'Neill said.They will require dismantling some of the policies that made Japan aleading economic power, he said. ``Do you really undo the things that have taken you where you are?From the Japanese policy maker point of view, that's the dilemma,''O'Neill said. ``I'm optimistic that they are finally going to be able to takethe actions that seemed so abundantly clear to us.''