The International Monetary Fund advised Japan to continue fiscal stimulus as growth is likely to weaken in 2018.
The lender cautioned that the expiration of fiscal support in 2018 under current policies together with a smaller expansion in foreign demand would reduce growth to less than half of that in 2017.
Without additional spending, the fiscal stance could become contractionary in 2018-20 due also to the scheduled consumption tax hike in October 2019, IMF staff said concluding the Article IV consultation.
Average inflation is forecast to fall to 0.6 percent in 2018 as growth slows. According to IMF, inflation is set to remain below the 2 percent target over the medium-term.
The lender urged the Bank of Japan to maintain a sustained accommodative monetary policy stance.
The IMF said the bank should carefully calibrate its yield curve policy, if downside risks materialize, to provide additional monetary easing.
"A comprehensive policy package—built around macro-critical structural reforms and income policies—is needed to make the most of monetary accommodation and available fiscal space," the IMF said.
The package should include a credible medium-term fiscal consolidation plan as well as policies to contain financial risks stemming from the low-interest rate environment and demographic headwinds, the lender added.
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