The Japanese yen is moderately overvalued from a medium-term perspective, the International Monetary Fund said Tuesday. The lender urged the central bank to expand asset purchases.

"The exchange rate has appreciated over the last year, partly because of inflows of capital seeking a safe haven," First Deputy Managing Director of the IMF, David Lipton said.

The asset-purchase program could be expanded 'substantially' beyond current plans to increase the likelihood of achieving the 1 percent inflation goal by 2014, it said.

The Japan's economy is forecast to expand by around 2 percent in 2012 and slow slightly to 1.75 percent next year. Nonetheless, the European debt crisis is likely to dampen demand for the country's exports, and weigh on business sentiment.

Moreover, Japan faces longstanding challenges like high public debt, low growth, and deflation. Japan needed to "move forcefully on many fronts to take advantage of synergies between policies," said Lipton.

Japan will have to achieve an overall fiscal consolidation of about 10 percent of GDP over the next decade, Lipton said. Tax and social security reforms are crucial to demonstrate a commitment to fiscal reform and sustain investor confidence.

RTTNews