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Japan needs to further relax its grip on credit and pursue drastic structural reforms to put its economy back on a recovery track, the International Monetary Fund said Tuesday.

“The combination of deflation and structural problems is a serious concern, underlying the urgency of additional monetary easing and aggressive structural reform,” the IMF said of Japan in its semiannual World Economic Outlook report.

The Washington-based institution released part of the report Tuesday before releasing the report in its entirety next week, including a section on the global economic outlook and policy recommendations.

In an analysis of the current global economic downturn featured in the released portion, the IMF said output losses in the United States and Germany are proving to be smaller than usual.

Italy and Canada appear to be skirting recession and France and Britain are likely to avoid output losses altogether, it said.

The IMF voiced strong concerns, however, about the Japanese economy, which is facing deflation coupled with structural issues, including a banking system riddled with bad loans.

“Japan is rather different. Its recession is deeper than the recent downturns in other major countries,” it said.

The IMF stated that Japan’s deflation is highly unusual.

“Japan provides the only case of deflation in industrial countries since World War II, likely reflecting inadequate aggregate demand rather than exceptional productivity growth,” it said.

The IMF also stressed the need for Japan to tackle its bad-loan issues, along with other problems that have long hindered the economy’s journey back to a sustainable growth path.

“It is now in its third recession since 1993, which resembles the experience of other countries with deep structural problems that saw sequences of short cycles in recent decades,” the report says.

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