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YOKOHAMA, Japan (Reuters) - Japan's economy still needs support from ultra-loose monetary policy despite budding signs of recovery, a senior IMF official said, stressing that it was premature for the central bank to consider withdrawing stimulus any time soon.
Mitsuhiro Furusawa, the International Monetary Fund's deputy managing director, said Japan should proceed with gradual increases in the sales tax to rein in its huge public debt as its economy benefits from a rebound in global demand.
But Japan's economy has not strengthened enough to pull the plug on monetary support, Furusawa said, adding that continued ultra-loose policy was crucial to make the recovery sustainable.
"I don't think we've reached that time yet," Furusawa told Reuters on Friday, when asked whether the time is ripe for the BOJ to consider withdrawing its monetary stimulus.
"As a whole, it's a good thing that easy monetary policy continues in Japan," he said on the sidelines of the Asian Development Bank's annual meeting in Yokohama, eastern Japan.
Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest since the global financial crisis a decade ago.
BOJ Governor Haruhiko Kuroda told a CNBC interview on Friday that he was confident inflation will accelerate "significantly" with massive monetary stimulus and fiscal support.
With the economy out of the doldrums, many analysts polled by Reuters expect the BOJ's next move to be a tightening, rather than a further easing, of monetary policy.
But core consumer prices for March rose just 0.2 percent from a year earlier, well below the BOJ's 2 percent target, a sign the Japanese central bank will lag behind its major counterparts in withdrawing monetary stimulus.
On fiscal policy, Furusawa said Japan should proceed with gradual increases in the sales tax, so that it can avoid being forced to hike sharply and abruptly, to rein in its debt.
"Considering Japan's fiscal state, it's desirable to gradually raise the tax rate. There's no doubt Japan should pursue fiscal consolidation given the size of its public debt," he said, when asked whether Japan should proceed with a scheduled increase in the sales tax hike in October 2019.
Japan's government has twice delayed a plan to raise the sales tax to 10 percent from 8 percent, after an earlier hike from 5 percent hurt consumption and growth.
Prime Minister Shinzo Abe has said he will proceed with the tax hike in October 2019, though some analysts say he may scrap the plan to prioritize growth over fiscal discipline.
Tax hikes and spending cuts are considered crucial to curb Japan's huge public debt which, at twice the size of its economy, is the worst among advanced economies.
On China, Furusawa said a gradual slowdown in growth wasn't a problem because the economy is undergoing structural changes.
"The fact that credit growth is accelerating at a pace exceeding that of GDP is worrying. But Chinese authorities are well aware of this issue, so I think the situation is manageable," he said.
Additional reporting by Takashi Umekawa; Editing by Simon Cameron-Moore