Japan's disaster-hit economy will expand 2.0 percent this year amid a surge in reconstruction spending, but it could be tempered by energy shortages and Europe's debt woes, the IMF said Tuesday.
In its latest World Economic Outlook, the International Monetary Fund upgraded its forecast on the world's number-two economy from its earlier 1.7 percent projection.
The economy shrank 0.7 percent in 2011 as it was hit by the March 11 quake-tsunami and resulting nuclear crisis, as well as heavy flooding in Thailand that hammered factory output for Japanese firms with plants there.
"With a timely boost from reconstruction spending, Japan is projected to grow at 2.0 percent in 2012," the report said.
However "the (debt) crisis in Europe and problems regarding energy supply are likely to dampen Japanese economic activity and exports."
However, growth was expected to be "subdued" at 1.75 percent in 2013, "reflecting the weak global environment and a decline in reconstruction spending," it added.
Japan's export-oriented economy has taken a hit amid a slump in orders from its major European market.
In a bid to address the problem Japan announced it was pledging $60.0 billion to the IMF as part of the organisation's bid to boost a global firewall against further eurozone crises.
A steady dwindling in the number of online nuclear reactors has raised energy supply concerns owing to strong public opposition to reactor re-starts following last year's atomic crisis at Fukushima, the worst in a generation.
Japan has been on a recovery path since the disasters pounded an economy in which hard-hit exporters were already struggling with fierce foreign competition and a strong yen making their products more expensive overseas.
However, an escalation in the eurozone's debt crisis could be magnified in Japan because the central bank's ultra-low interest rate policy largely rules out further cuts to stoke the economy.
"In Japan... further monetary easing can help strengthen growth prospects," the report said, adding that asset purchases "may need to be expanded."
Last month, the central bank boosted a loan programme aimed at reconstruction by 2.0 trillion yen ($24.5 billion) to 5.0 trillion yen, while saying in February it would increase an asset purchase programme by 10 trillion yen to about 65 trillion yen as part of efforts to kickstart the economy.