The International Monetary Fund said Monday that the Bank of Japan should proceed with further hikes in its short-term policy rate at a "gradual pace," after the bank raised interest rates in March for the first time in 17 years.

The Washington-based body said its executive directors agreed that purchases of Japanese government bonds by the BOJ "will help mitigate excessive shifts in yields that could undermine macro-financial stability during this historic policy transition."

The statement, released following the conclusion of a regular bilateral consultation with Japan on May 6, also underlined the need for a "clear and effective communication strategy" by the BOJ regarding factors affecting the pace of policy rate increases.

The BOJ guides short-term rates in a range of zero and 0.1 percent, with financial markets closely watching when it will raise them again or how the bank may change its bond-buying plans.

The IMF also recommended the Japanese government to pursue fiscal consolidation through measures on revenue and expenditure.

"Any new spending should be offset by higher revenues or savings elsewhere in the budget given a closed output gap and high debt-to-GDP ratio," the IMF said.

IMF maintained its growth expectations for Japan's real gross domestic product at 0.9 percent in 2024 and 1.0 percent in 2025.

It said consumption in the country is expected to pick up "in the latter half of 2024 and 2025" due to a rise in wages and an expected gradual decline in inflation.

Downside risks to Japan include "more acute labor shortages that could constrain activity," the IMF said.

It called on the Japanese government to adopt a "steadfast policy" against the longer term challenge of "low productivity growth due to population aging and labor market rigidity.

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