In their Article IV report, a regular assessment of the world's second largest economy, the IMF economists said Japan's key task is to bring down its high public debt-to-GDP ratio, one of the highest among advanced countries.
The IMF said the recent turmoil in Europe increased Japan's vulnerability to sovereign risk.
''Bringing down the debt ratio will require a large and protracted adjustment and, with global scrutiny of public finances on the rise, the need for early and credible fiscal adjustment has increased,'' said James Gordon, IMF mission chief for Japan.
''We welcome the government's proposed fiscal strategy and look forward to further details,'' Gordon added.
Japan's economy is gaining strength following the global recession but, with a sharpened global focus on sovereign risks in some countries, the government needs to draw up a credible fiscal adjustment plan to secure the country's long-term economic health, say IMF economists.
Japan's economy is rebounding from one of its deepest recessions in post-WWII history. The recovery gained strength in recent months, fuelled by robust exports and policy stimulus. The IMF expects Japan's GDP growth to rise to 2.4 per cent in 2010 and forecasts an easing of deflation.