The International Monetary Fund predicted Thursday that Japan's economy will shrink 0.5 percent this year, in line with a half-point decrease last year.
Japan still faces "considerable downside risks" in its economy, the IMF said, sounding the warning in its annual report on the Japanese economy, which has gone through two years of minus growth in the past four years.
Any recovery will be short-lived unless Japan's deep-seated structural problems in the banking and corporate sectors are addressed "urgently and comprehensively," the report warns. "Complacency must be avoided at all costs, as this would only serve to prolong Japan's decade of stagnation, as well as heighten the vulnerabilities from the bank, corporate and fiscal sectors."
The report says the IMF Executive Board endorsed a four-point integrated policy strategy for Japan as recommended by IMF economists that, among other things, calls for addressing structural weaknesses in Japanese banks with bad-debt problems and accelerating corporate restructuring.
The government should lay out a credible medium-term fiscal consolidation strategy while maintaining a broadly neutral stance in the near term, according to the IMF.
The IMF advises monetary authorities to adopt an aggressive monetary policy to bring Japan's deflationary spiral to an early end.
These four pillars of reform are interlinked, the IMF economists said, arguing that supportive macroeconomic policies will be needed to mitigate resistance to painful restructuring in the private sector.
"Without such restructuring, supporting macroeconomic policies alone should not be counted on to lead Japan's economy out of its decade-long slump in a sustainable way," the IMF report says.