In a sharply worded report issued two weeks after prime minister Keizo Obuchi took office, the IMF complained that Japan had not done enough to stimulate its recession-hit economy, the world's second largest.

It said that the new government could put the yen at risk of further depreciation and undermine the economies of other crisis-hit Asian states unless it acted decisively.

IMF officials, like those in the United States and other countries, have long expressed concern about Japan's sluggish economic performance.

"While the government has taken a number of welcome initiatives, the overall response thus far has fallen short of the timely, comprehensive and forceful programme that is required, given the seriousness of the present situation," said the IMF report, which summarized anAugust 5 review.

Admitting that conditions had deteriorated since it last studied Japan, the IMF said it expected the economy to contract by 1.7 per cent in 1998. In April, it forecast zero growth for the year.

The IMF said the Japanese economy could start to recover later this year, assuming that previously announced stimulus packages had their intended impact.

But it still expected business investment to weaken further, and said deteriorating household confidence and rising unemployment would likely dampen consumption.

Economic growth in 1999 would be low, the IMF said, adding that the "downside risks are considerable."

The IMF said Japan had no time to waste.

The government needed to implement far-reaching measures to deal with the bad loan problem in the banking sector and restore the financial system to health, it added.

"Such action is essential for the Japanese economy, and equally essential to underpin a turnaround in the Asia region more generally," the IMF said.

"The desired recoveryin confidence and activity would not be forthcoming without decisively addressing the challenge of banking sector reform," the fund said.

Obuchi last Friday announced plans to cut taxes for firms and individuals, but said the proposals would take two years to implement.

The IMF called for broad tax reform, and said tax cuts for Japanese companies and workers were warranted. The government might also consider temporarily cutting the consumption tax to stimulate short-term demand.

The IMF sought a more ambitious deregulation effort, urging authorities to press ahead with plans to liberalise the telecommunications and energy sectors.

In its report, the IMF warned against letting the yen depreciate further.

It said intervention by the United States and Japan to support the yen in June had helped. The move knocked back the dollar by about five yen, although the greenback has since recovered to above pre-intervention levels.

"Failure to follow through with supporting policy actions could trigger furtherdownward pressures on the yen," the IMF said.

It said Japanese short-term interest rates were appropriate for now, but a few directors said a rate cut might be needed later in the year if Obuchi's planned tax cuts and other measures failed to stem the economic decline.

The IMF's report on Japan was far rosier last year when the IMF said the strong yen was justified by robust fundamentals, and even suggested authorities might have to raise interest rates to slow strong growth.