BOJ policy right as Japan economy set to slow -IMF

TOKYO, May 22 (Reuters) - Japan's economy is set to slow as global growth weakens and energy costs soar, so the Bank of Japan is right to keep rates steady until the economic uncertainty clears, a senior IMF official said.

But on the fiscal policy front, Japan could do more to rein in its mountain of public debt, such as raising the consumption tax, Daniel Citrin, deputy director of the International Monetary Fund's Asia and Pacific Department, told reporters.

Citrin said the Japanese economy grew strongly in the first three months of this year and has shown welcome resilience to slower U.S. growth, but more recent indicators suggested Japan was heading for a slowdown.

"The momentum is set to slow with the lower global growth, stagnant U.S. economy in particular, and deteriorating terms of trade reflecting a sharp increase in global energy and commodity prices," Citrin said, adding that the outlook was subject to "considerable uncertainty."

The world's second-largest economy unexpectedly picked up pace in the first quarter, as exports have so far weathered a U.S. slowdown, growing 0.8 percent from the previous quarter, or an annualised 3.3 percent expansion, data showed last Friday.

Citrin said Japan's economy would probably grow 1.4 percent this year and 1.5 percent in 2009, sticking to forecasts from the IMF's World Economic Outlook report released in early April.

A team of IMF officials is in Tokyo for the IMF's annual Article IV consultation discussions with Japan. Citrin made his comments on Wednesday on condition that they be released on Thursday.

In the past, the IMF has often fretted over the BOJ's monetary policy, but Citrin said the Washington-based institution and the Japanese central bank were on the same page now.

"Monetary policy is on hold until concerns over the outlook ease, and we believe that that is appropriate," Citrin said.

The BOJ has kept its key policy rate unchanged at 0.5 percent since February last year.

In late April, the BOJ dropped a two-year bias towards raising rates and took a neutral stance on monetary policy, saying it was inappropriate to predetermine its policy direction given the high uncertainty.

Citrin also said he saw no need for the BOJ to set a strict inflation targeting policy, adding that the central bank has improved its communication with markets by more specifically explaining its views on economic risks in its twice-yearly outlook report released on April 30.

Citrin, however, expressed wariness about the pace of fiscal consolidation efforts, calling on the Japanese government to set more ambitious goals.

"I am going to sound like a broken record," he said.

"But the primary focus of conducting policy should be guided by the need to reduce very high public debt and to address demands from the ageing population that is increasing year by year."

As expenditure cuts are reaching the limit and a natural recovery of revenues is tough as the economy slows, raising the politically sensitive consumption tax from the current 5 percent and broadening the income tax base should be considered, Citrin said.

"Notwithstanding an uncertain growth outlook this year, we believe that a much more ambitious plan over the next several years would be appropriate." (Reporting by Yoko Nishikawa; Editing by Hugh Lawson)