Recovery has strengthened in Japan's economy, the IMF believes

The Washington-based lender forecast that Japan's gross domestic product would rise to 4.5% in 2004, topping a previous estimate of 3.4%.

The IMF said the world's second biggest economy would see an end to price deflation by the end of the year.

"There are clear indications that Japan's long-standing economic problems have eased," the IMF said.

'Recovery strengthens'

The IMF said it expected Japan's consumer price index rate of inflation to fall 0.1% in 2004, with deflationary pressures "ebbing to zero" by the end of next year.

"Deflationary pressures have eased, against the backdrop of a narrowing output gap and supportive monetary policy," the IMF said.

"Recovery has strengthened and become more broadly based, while labour market conditions have improved," it added.

However, the IMF warned its upbeat outlook for Japan could be threatened by a sharp rise in global interest rates or a slowdown in the economic performance of its main trading partners.

The IMF also noted ongoing weaknesses in the country's financial and corporate sectors, and said the high level of public debt could hold back growth in the medium term.