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Horst Koehler, managing director of the International Monetary Fund, said Tuesday he believes Japan’s economic recovery is sustainable and commended the nation for its financial system reforms that have seen steady falls in banks’ bad loans.

“I do think it is sustainable,” Koehler told reporters in Tokyo after meeting with Heizo Takenaka, state minister in charge of economic and fiscal policy, when asked about the current pace of recovery in the world’s second-largest economy.

Koehler told reporters after meeting with Prime Minister Junichiro Koizumi: “This time, the recovery is not based on additional spending . . . for public works and so on, but based on investment and of course good exports. We do think it will after some time also translate to stronger consumption so that the recovery is home-based in substance, and that’s a good signal.”

He said he and Koizumi “agreed that there is clearly improvement here in Japan about the economy.”

Japan announced last week that its gross domestic product marked the sharpest growth in 13 1/2 years during the October-December quarter, spurred by brisk exports and capital spending on the back of robust recoveries of the U.S. and Asian economies.

Koehler, on a two-day visit to Tokyo through Wednesday, hailed Japan’s progress in revitalizing the financial system.

“It is a clear recognition from my side, from the IMF, that there is progress here in Japan in reforming the financial sector in getting down the numbers of nonperforming loans,” he said.

Koehler was referring to recent declines in bad loans held by major banks. The ratio of dud loans against outstanding loans at major banks fell to some 6.5 percent as of Sept. 30, leading policymakers to believe Japan can end the bad-loan problem by March 2005 by cutting the ratio to the 4 percent level.

The IMF chief said he was encouraged by Japan’s efforts to rev up the finances and operations of regional small and midsize financial institutions, in an apparent reference to the so-called relationship banking program, which calls for regional lenders to revive businesses while giving close consideration to local economies and companies.

“I was also very pleased that the minister is already looking forward, recognizing more has to be done, for instance, including the regional banks, so that I have a good feeling that Japan and the authorities in charge of (the) financial sector are fully aware of the problems,” he said.

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