The International Monetary Fund has said that Japan is likely to wrestle with deflation through 2011 as it struggles to recover from severe recession.

'Inflation is projected to remain negative until 2011,' the IMF said in a report.

The IMF sees prices falling 1.1% this year, 0.8%in 2010 and 0.4% in 2011.

The world's second-largest economy has benefited from its 'well-calibrated response' to the worst recession in decades, said the report on a consultation with Japanese authorities that ended on July 6.

But the IMF directors said authorities will need to ratchet up the battle against recession if downside risks turn out to be real.

A week ago the Washington-based institution raised its outlook for Japan to gross domestic product growth of 1.7% in 2010, after a 0.6% contraction this year.

Concerns have been growing about the prospect of another bout of deflation in Asia's largest economy.

Japan was stuck in a deflationary spiral for years after an economic bubble burst in the early 1990s, prompting consumers to postpone spending in the hope of further price drops, further deepening the slump.

The IMF outlook was in line with those of the Bank of Japan.

Yesterday, the central bank yesterday revised downward growth forecasts, to a 3.4% contraction in the financial year to March 2010, and growth of 1.0% in the next financial year.