The International Monetary Fund said Japan's economy will shrink 0.7 percent this year due to the earthquake and tsunami disasters, but forecast growth to bounce back in 2012 as rebuilding gets under way.
It also said Wednesday that Tokyo raise its sales tax next year to help finance reconstruction projects and rein in its bulging national debt, the highest among advanced economies.
The IMF slashed Japan's economic forecast from its previous projection for 1.4 percent growth in April.
But the economy is expected to recover "sharply" over the summer as rebuilding kicks in and supply constraints ease. In 2012, the economy is expected to grow 2.9 percent, up from an earlier forecast of 2.1 percent, the Washington-based body said.
"Japan's economy continues to face headwinds from the earthquake but should start to recover strongly in the second half of the year," the IMF said in a statement after a team visited Tokyo.
The IMF urged timely passage of a second supplementary budget to help cover rebuilding costs from the March 11 disasters, which the Japanese government has estimated could reach $310 billion. That would make it the most expensive natural disaster on record.
The IMF also urged Tokyo raise its sales tax from the current 5 percent to between 7 percent and 8 percent to finance rebuilding projects and tackle its mounting debt. Japan's government debt is over 200 percent of gross domestic product and the IMF said that could surpass 230 percent this year.
"Relying mainly on debt financing would add to fiscal risks stemming from an already high level of public debt," the report said.
International Monetary Fund: http://www.imf.org