The International Monetary Fund stated on Thursday that the Bank of Japan should apply "more flexibility" on its policy on long-term Japanese government bond yields to ensure stability in the face of economic uncertainty and potential "side-effects of prolonged easing."

There are both upside and downside risks to the inflation outlook in Japan, the IMF said in a statement, adding that the BoJ's "accommodative monetary policy stance remains appropriate" as inflation, "without substantial acceleration in wage growth," is expected to fall below 2% again by the end of next year.

In addition, the IMF noted that "fiscal policy support should be withdrawn more quickly," especially considering the consequences of the government's October 2022 relief package on the already elevated overall fiscal deficit. The package could also "add to inflation, which would require a stronger monetary tightening response," the IMF argued.