The Japanese economy is expected to shrink 0.7 percent this year mainly due to the natural disaster in March, the International Monetary Fund (IMF) said in a report released on Tuesday.
"The Great East Japan Earthquake and Tsunami on March 11, 2011 brought Japan's nascent recovery to a halt," said the IMF in its annual economic situation assessment of Japan. However, the world third largest economy is set to expand later this year.
"GDP growth is expected to slow to -0.7 percent in 2011 before rising to 2.9 percent in 2012," the 187-member international financial institution said.
Headline inflation in Japan is projected to be around zero percent in 2011 and 2012, while underlying inflation- excluding food and energy- will likely remain negative as a result of the still wide output gap.
The report noted that uncertainty surrounding the Japanese economic outlook is large with the risks mainly on the downside. The key risks facing the recovery are from delays in restoring electricity capacity and a slow pick-up in private demand.
It said after a sharp contraction in the first half of this year, supply conditions are expected to normalize this summer and reconstruction spending to pick up steadily. The recovery is forecast to continue in 2012 as the resumption of exports lifts domestic demand and reconstruction spending continues.
On spillovers, the IMF said that although policy spillovers from Japan on the global economy have been relatively limited in recent years, Japan remains an important contributor to regional growth and stability.