The Japanese economic outlook remains uncertain due to supply disruptions and weak sentiment and additional monetary policy easing and faster structural reform is needed to support the recovery, the International Monetary Fund (IMF) said in a statement on Wednesday.

The lender expects Japan's economy to recover sharply as supply conditions normalize and reconstruction spending picks up. The recovery is expected to continue next year as the resumption of exports lifts domestic demand and reconstruction spending continues.

The IMF sees the Japanese economy shrinking 0.7 percent this year, following 4 percent growth in 2010. Next year, the economy is seen rebounding with 2.9 percent expansion.

Headline inflation is seen around zero percent in 2011 and 2012. Meanwhile, underlying inflation that excludes food and energy is projected to remain negative due to the wide output gap.

The IMF report said the Bank of Japan could guard against deflation risks through further monetary easing and additional purchases of private assets. The yen could weaken going forward as Japan's accommodative monetary stance is likely to last longer than those of other advanced economies. A weaker yen could affect other economies via trade and financial channels, the lender added.

On the fiscal policy front, the immediate priority is to repair damaged infrastructure and facilitate a swift recovery, the report said. The lender estimates the cost of reconstruction to be between 2 percent to 4 percent of GDP over several years. The IMF also recommended a moderate increase in the sales tax from 5 percent to 7 percent-8 percent, starting next year on commencement of a cyclical recovery.

RTTNews