IMF urges BOJ to stand ready to ease if inflation cools further

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan should be ready to ease monetary policy further if needed to accelerate inflation toward its 2 percent target, preferably by buying government bonds with longer maturity, the International Monetary Fund said on Tuesday.

Japan's core consumer prices in August marked their first annual drop since the central bank deployed its massive stimulus program more than two years ago, casting further doubt on whether heavy money printing alone can boost the economy and accelerate inflation to the BOJ's target.

The IMF said several factors will put upward pressure on inflation and help it gradually accelerate to 1.5 percent over the medium term, such as a continued tightening of the labor market and the effect of recent yen declines, the IMF said.

But near-term prospects for Japan's economic activity have "weakened," while medium-term inflation expectations are stuck substantially below the central bank's target, the global lender said in its World Economic Outlook report.

"The Bank of Japan should stand ready for further easing ...," it said.

The IMF also urged Japan to pursue "more forceful" structural reforms, such as raising service-sector productivity through deregulation and building more child-care facilities to encourage more women to join the workforce.

Japan's economy is projected to expand 0.6 percent this year and 1.0 percent in 2016, the IMF said, revising down its forecasts for both years by 0.2 percentage point each from July.

The pick-up in growth reflects rising real wages, higher equity prices due to the BOJ's stimulus program and the support corporate profits will get from lower oil and commodity costs, it said.

Japan's economy contracted in April-June and analysts expect growth to stagnate, or even shrink again, in the third quarter as weaker Chinese demand weighs on already sluggish exports and factory output.

The BOJ is expected to hold monetary policy steady on Wednesday, preferring to save its limited options while hoping that a tightening job market will lift wages and consumption enough to offset the pain from China's slowdown.

But the central bank is likely to remain under pressure to ease at a more crucial meeting on Oct. 30, when it is expected to cut its long-term economic and price projections due to sluggish exports and renewed oil price falls.

(Reporting by Leika Kihara; Editing by Kim Coghill)