The International Monetary Fund downgraded its growth projection for Japan and urged the government to take fiscal policy that supports near-term growth and stimulate price momentum.
According to the concluding statement of the 2019 Article IV mission to Japan, the country's economy is set to expand 0.8 percent this year, which was slower than the previous forecast of 0.9 percent.
For 2020, real GDP growth is projected to slow to 0.5 percent, as external demand remains soft and dampens export-related investment.
At the same time, headline consumer price inflation is projected to continue its slow upward trend towards - but still below - the Bank of Japan's 2 percent target.
The lender sees downside risks to this outlook, namely, sharper-than-expected global slowdown and heightened uncertainty, durability of domestic demand and rising financial stability risks.
The BoJ's accommodative stance needs to continue to support reflation and growth, the IMF said.
Fiscal policy should be supportive to protect near-term growth and promote inflation momentum, the report said. Beyond the short-run, a clear commitment to long-term fiscal sustainability is essential, the lender added.
Further, IMF called for a gradual increase in sales tax to 15 percent by 2030 and to 20 percent by 2050, so as to finance aging costs. The rate of taxation on capital gains should be gradually increased to 30 percent, starting in 2022, the lender said.