Japan's public debt stands at more than twice the size of its economy, the highest ratio in the developed world, with its fast-ageing population boosting social security costs and straining the fiscal situation.
The IMF staff discussion paper on Tuesday highlighted the fiscal challenges shrinking and ageing populations pose, with projected rises in pensions and health care spending not just in Japan but also many other countries by the end of this century.
Without reforms of public pension and healthcare systems, age-related expenditures could cause unsustainable rises in public debt, sharp cuts in other spending, or necessitate big tax increases that could stymie economic growth, it warned.
Gaspar, former Portuguese finance minister who was the architect of the country's austerity measures, said the inflow of foreign workers and greater participation of women in Japan's labor force are promising options to reduce age-related expenditures.
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Turning to monetary policy, Gaspar said Japan and other countries could make a successful transition to inflation at 2 percent and sustainable growth if they pursue comprehensive policies.
"If monetary policy proves ineffective at reaching 2 percent target in a timely manner, a comprehensive approach involving fiscal and structural (policies) may be necessary to make sure it works," he said.
"If this comprehensive approach is followed, it is possible to affect expectations in an effective way and therefore guarantee adjustment towards sustainable growth with moderate inflation at 2 percent."
With inflation at a standstill, the Bank of Japan meets for a policy review on Friday amid market speculation that it may expand its already massive monetary stimulus in order to hit an ambitious 2 percent price goal next year.