The International Monetary Fund said Wednesday that Japan should maintain its ultraloose monetary policy for now and that further easing steps may be necessary to fight deflation.
"As for Japan, with the re-emergence of deflation, the current accommodative monetary policy stance remains appropriate, but additional easing measures may be necessary if deflation persists," the IMF said in its semiannual World Economic Outlook report.
The report is likely to add pressure on the Bank of Japan not to tighten its monetary grip hastily after it completes the unwinding of emergency steps designed to cope with the global financial crisis.
The IMF forecasts that the Japanese economy will expand 1.9 percent in terms of real gross domestic product this year aided by a pickup in exports, following a steep contraction of 5.2 percent in 2009.
The growth projection for 2010 was revised upward by 0.2 percentage point from the previous revision in January.
The pace of the recovery is expected to remain modest, however, with growth forecast at 2.0 percent in 2011, down 0.2 point from the January projection, owing to such factors as weak domestic demand, the re-emergence of deflation and a weak labor market.
The IMF also asked Japan to take action to restore its fiscal health by reducing public debt.
"Developing and communicating credible medium-term consolidation plans would be advisable," the report says. "Japan faces significant challenges in strengthening domestic demand and fighting off deflation, given the need to bring down the high level of public debt and with the policy rate near zero."