This should result in increased competition and productivity, which lags behind other industrialized countries, it said in a report, prepared in January, for a review this week of Japan's trade policy.
"Improving productivity is particularly important due to the downside risks from Japan's rapidly aging population and the associated decline in the labor force," the WTO said.
The review is part of a regular process in which each of the WTO's 153 members is scrutinized every few years, giving an opportunity for other countries to question them on aspects of their trade policy.
It noted the government believed in the need to intensify structural reforms that would help reduce or remove distortions to competition that impair economic efficiency.
"There is a risk of firms' misallocating capital due to the comparatively low cost of capital in a low interest rate environment," it said.
In terms of domestic policy, Japan's medium and long-term growth prospects depend on its ability to strike a balance between monetary and fiscal policies together with structural reforms, the WTO said.
At the time of completing the report -- Jan. 14 -- Japan's economy appeared to be on the brink of a recession, whose depth and duration remain to be seen, it said.
In its latest outlook, the International Monetary Fund forecasts Japan's economy will contract 2.6% this year after 0.3% in 2008, before growing 0.6% in 2010.
External factors affecting Japan's prospects include growth in its main export markets -- the United States, the European Union and China -- and energy and raw materials prices, the WTO said, noting recent growth had depended substantially on external demand.
"The adverse effects of the global slowdown on Japan's exports, and thus economic growth, is likely to be exacerbated by the recent appreciation of the Japanese yen, partly due to the unwinding of yen carry trade," it said, referring to speculative purchases of low-interest yen to invest in assets denominated in higher-yielding currencies.
But the stronger exchange rate would counter any increases in energy or raw materials prices, it said.
The WTO said Japan had not introduced any new trade measures to protect its market since the financial crisis broke in September.
Although Japan is a member of the government procurement agreement and domestic suppliers have no formal preferences, the share of foreign suppliers in the total value of government procurement was only 3.1% in 2006, the last year for which data are available, it said. (Reuters)
