By Agence France-Presse Japan is set for an alarming 1.0% contraction in 2002 as it slips deeper into its third and most severe recession of the past decade, the International Monetary Fund (IMF) warned April 18. Japanese policymakers, who had failed to clean up debt-ridden banks throughout the past decade, must now act now, the IMF's twice-yearly World Economic Outlook said. "The inability to achieve sustained growth over the past decade reflects the failure to deal decisively with deep structural impediments," the IMF said. "This is most urgent in the banking system." The government also should unleash a fresh spending program in the second half of this year to throw the economy a lifeline, said the report, released ahead of weekend IMF and World Bank meetings. The Bank of Japan, meanwhile, may be forced to set a target date for ending deflation. Such measures may depress the yen, IMF chief economist Kenneth Rogoff conceded at a news conference. But "the main vulnerability of the global economy lies in a sustained downturn in Japan rather than in policies that would lead Japan to grow again." In fact, short-term prospects for Japan were a "considerable concern," the IMF report said. Gross domestic product (GDP) would decline 1.0% this year, before recovering to meager growth of 0.8% in 2003, as weak private demand persisted, the report forecast. A global slowdown and a slump in demand for information-technology goods had battered Japanese exports, the IMF said. Meanwhile, consumption within Japan deteriorated as the unemployment rate set new records, overtime hours fell and real earnings stagnated. Business investment weakened dramatically late last year. Japan could perform better than expected if the world economy and the IT sector did surprisingly well, the IMF said. But "downside risks predominate given the difficult domestic environment." Copyright Agence France-Presse, 2002