TOKYO (Kyodo) -- Japan should capitalize on its current economic expansion by pushing for labor and other structural reforms, the International Monetary Fund said Monday.
The IMF also said the country's monetary policy should be accommodative, calling on the Bank of Japan to "carefully calibrate" its yield curve control policy aimed at guiding long-term interest rates around zero and enhance its communication with market participants.
"We feel the best policy is to make the most of the positive (economic) momentum at present and to push ahead with needed reforms," IMF First Deputy Managing Director David Lipton told a press conference in Tokyo.
In its assessment of Japan released Monday, the IMF said the country needs a well-coordinated reform package combining continued fiscal and monetary support with structural reforms.
As market credibility matters in making monetary policy a success, the IMF proposed steps for the BOJ to strengthen its communication framework, including "phasing out references" to its annual purchase targets of government bonds. The BOJ has set 80 trillion yen ($720 billion) as its annual purchase target.
Japan's economy has been on its longest run of expansion since 2006 thanks to robust overseas demand, particularly in other parts of Asia. Still, wages have barely been growing in Japan, with domestic demand such as private consumption and corporate spending lacking strength.
The government of Prime Minister Shinzo Abe is now seeking to promote labor reforms, including imposing a binding cap on overtime hours and eliminating discrimination between regular and nonregular workers.
During the press conference, Lipton acknowledged that it appears "hard" to explain the slow pace of increase in wages in advanced economies.
"We hope that this set of reforms will go forward and will contribute to stronger wage growth" in Japan, he added.
The IMF pointed out that Japan's labor shortages have yet to feed through to wages and inflation remains subdued, citing as policy challenges "demographic headwinds and an unprecedented level of public debt."
The government continues to face an uphill battle to achieve both economic growth and fiscal rehabilitation. Its goal to turn a deficit in the primary balance into a surplus by fiscal 2020 appears increasingly elusive, with an interim fiscal review planned next year.
The report said Japan should focus on a "gradual, pre-announced schedule of consumption tax rate hikes" until the rate reaches at least 15 percent.
The Abe administration has postponed its planned tax hike to 10 percent from the current 8 percent until October 2019.