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[TOKYO] Japan must avoid overly relying on a weak yen to reflate the economy by deploying a new round of structural reforms such as steps to boost labour market participation, the International Monetary Fund said on Thursday.
The global lender also warned that while inflation is seen accelerating to about 1.5 per cent over the medium term, hitting the Bank of Japan's 2 per cent target remained "challenging."
The BOJ must stand ready to expand stimulus to meet its target, though further easing without bolder structural reforms and a credible fiscal strategy could lead to over-reliance on yen depreciation to reflate the economy, it said.
"Abenomics needs to be reloaded so that policy shortcomings do not become a drag on growth and inflation," the IMF said in a statement after Article 4 consultations with Japan.
The IMF said further declines in the yen relative to its 2014 average was beneficial for Japan's economy.
"(But it) made it important for the authorities to continue with bold structural reforms and credible fiscal consolidation to avoid over-reliance" on yen depreciation in pursuing domestic policy objectives, it said.
Premier Shinzo Abe's stimulus policies, dubbed "Abenomics,"consist of the three arrows of bold monetary stimulus, flexible fiscal policy and a strategy to boost Japan's growth potential.
Analysts hail the first two arrows for reflating short-term growth, partly by boosting revenues at big exporters via a weak yen. But many criticise the third arrow as lacking teeth as Mr Abe struggles to deregulate the job market and open up heavily protected sectors such as agriculture.
The IMF urged Japan to launch a new round of reforms to lift labour supply and open up its agricultural and service sectors.
While welcoming the government's new medium-term fiscal consolidation plan, it called on policymakers to use "realistic economic assumptions" in laying out a plan to cut the country's huge debt pile.
The blueprint of Japan's fiscal strategy for the coming years, released last month, refrained from setting a mandatory cap on annual budget spending, reflecting Mr Abe's focus on boosting growth rather than on curbing expenditure in restoring Japan's fiscal health.