TOKYO - Japan must tackle fiscal consolidation to reduce its debt burden in the long run in order to boost public confidence about the sustainability of its economy, the International Monetary Fund's acting chief, John Lipsky, said on Wednesday.

The world's third-largest economy will rebound from the damage of the March 11 earthquake and tsunami in the coming year as supply networks are restored, Lipsky said. Recent data has already shown factory output is recovering, he added.

"The government has responded quickly with supplementary budget and plans for further action. This strikes us as appropriate," Lipsky told Reuters in an interview. "In addition, the Bank of Japan also reacted quickly and stands ready to take further action if needed to support the recovery."

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Lipsky, the IMF's No 2 and its acting managing director, was speaking after the organisation carried out an annual review of Japan's economy and economic policies.

"In the long run, it's clear that Japan requires a process of fiscal consolidation that would eventually begin to reduce the burden of public debt relative to GDP," he added. "That's an important element, giving confidence to the Japanese people about the long-term sustainability of the outlook and it's also important to Japan's partners."

Japan's public debt is already about twice the size of its $5 trillion economy and rating agencies are threatening to downgrade it due to the cost of reconstruction after the March 11 earthquake and tsunami and concerns that a policy logjam will thwart fiscal reforms.

A further supplementary budget is not only appropriate but certainly necessary to account for the significant cost of reconstruction that will carry over not just in the coming fiscal year but beyond as well, Lipsky said. But he did not elaborate as details of the next extra budget are unknown.

Lipsky said Japan, like nearly all advanced economies, must ensure confidence about the long-term sustainability of public finances. These economies have been left with high public debt and deficits in the wake of the global financial crisis and face rising costs of social welfare due to ageing populations, he added.

Data showed last week that Japan's industrial output rose 1 percent in April after a record plunge in March registered following the magnitude 9.0 quake, a tsunami and a nuclear crisis, and companies said they planned to raise output further in May-June. But there are still uncertainties about recovery in Japan's power sector and some doubts about external demand, Lipsky said, citing high unemployment in advanced economies as a risk to the global economy.

Lipsky, whose term expires in August, is serving as the acting managing director after Dominique Strauss-Kahn resigned on May 18.

The top IMF job fell vacant after Strauss-Kahn was arrested and charged last month with the attempted rape of a maid in a New York hotel. He has denied the allegations against him.