WASHINGTON (Kyodo) The International Monetary Fund urged Japan Wednesday to focus on its fiscal health, as fiscal stimulus steps expand the nation’s deficit to an increasingly precarious level.

In its biannual World Economic Outlook report, the Washington-based lender also said the U.S. economy — the epicenter of the global financial crisis — will probably start recovering by the middle of 2010, if appropriate policy responses remain in place.

“In Japan, the government announced a substantial new stimulus package in early April, which should support activity in 2009 and 2010,” it said, noting that this and past stimulus measures have almost exhausted Tokyo’s room for additional stimulus steps.

“Attention should shift now to putting in place an ambitious medium-term plan to secure fiscal sustainability,” it said, alluding to the need for a hike in the 5 percent consumption tax.

The IMF trimmed Japan’s growth projection in terms of real gross domestic product to minus 6.2 percent for 2009, down 0.4 percentage point from its prior forecast released in mid-March, and marking the worst projection among major industrialized nations.

“In Japan, the downturn is exceptionally severe, and is being driven largely by trade, which has been hit hard because of the economy’s heavy reliance on manufacturing exports, and by spillovers to domestic investment,” it said.

“The yen’s strength and tighter credit conditions more generally have added to the problems of the export sector. Mild deflation is expected to persist at least through 2010.”

Japan’s future monetary policy will be a challenge in light of the current rock-bottom interest rates, the IMF said, questioning if Tokyo can “implement further easing by expanding and broadening the range of instruments that support credit to address tightening financial conditions.”

2010 growth is forecast to recover to 0.5 percent, against a previously forecast decline of 0.2 percent, factoring in the effects of the stimulus packages, including one adopted earlier this month with ¥15.4 trillion in actual spending.

As for the U.S., whose subprime mortgage meltdown triggered the global crisis, the institution projected its growth to contract 2.8 percent in 2009 and to recover to zero percent in 2010, both down 0.2 point.

“The biggest financial crisis since the Great Depression has pushed the United States into a severe recession,” it said. “Progress toward normalization of financial conditions has been much slower than envisaged a few months ago.”

But the IMF said that contingent on the current fiscal and monetary policy responses continuing, “the economy is projected to start recovering by the middle of 2010.”

It also cited the need to restore the health of the core U.S. financial institutions, stimulate private demand, lower the downside risk of asset price overshooting and reduce uncertainty facing households, firms and financial markets.

“Crucially, policies must address the problems at the core of the financial system: the growing burden of problem assets and uncertainty about banks’ solvency,” the IMF said.

“Balance sheets need to be restored, both by removing bad assets and by injecting new capital in a transparent manner, so as to convince markets of these institutions’ return to solvency,” it said.

In other parts of the report, the IMF estimated its global economic forecasts at minus 1.3 percent for 2009 and plus 1.9 percent for 2010. They compare with the earlier outlooks of a fall of 0.5 percent to 1.0 percent for 2009 and an expansion of 1.5 percent to 2.5 percent for 2010.

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