The Bank of Japan's monetary easing last month should support economic growth and help end deflation, but more easing may be needed to hit the bank's 1 percent inflation target, the International Monetary Fund said on Tuesday.
In its semi-annual World Economic Outlook, the IMF also trimmed its growth forecasts for the world's third-largest economy citing factors affecting Asian economies in general -- weaker demand for exports and a slowdown in China.
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Compared with its July forecast update, the IMF cut this year's growth estimate for Japan to about 2.2 percent from 2.4 percent and next year's to 1.2 percent from 1.5 percent.
Relatively robust growth this year followed by a slowdown in 2013 reflected the temporary effect of rebuilding from the March 2011 earthquake and tsunami and a manufacturing rebound from Thai floods late last year, the IMF said.
"The easing of monetary policy announced in September should help support economic growth and exit from deflation," the Fund said in its report. "Further easing of monetary policy may, however, be needed for inflation accelerating toward the Bank of Japan's goal of 1 percent."
The BOJ set the inflation target in February to assure markets of its determination to end deflation that has weighed on consumption and business investment for a decade. It followed through by boosting purchases of government bonds and other assets -- its main policy tool -- three times this year. The last easing was announced in September.
The central bank paused at its meeting last week, but left the door open to more stimulus, possibly as soon as on October 30 when its policy board meets again and is expected to admit that it remains far from reaching its inflation target.
The IMF forecast that while consumer prices would stabilize this year after a 0.3 percent drop in 2011, mild deflation would resume in 2013 with a 0.2 percent decline.
The Fund also praised the recent approval of a gradual doubling of the consumption tax rate to 10 percent by 2015 as an important step, but reiterated that further consolidation was needed to bring Japan's public debt back on a sustainable path.
(Reporting by Tomasz Janowski; Editing by Neil Fullick)