The International Monetary Fund on Tuesday raised its growth forecast for Japan's economy for this year and next, but warned that a shrinking labour force and weak inflation will be a drag on the country's prospects.

The IMF said it now expects the world's number three economy to post 1.5 percent GDP growth in 2017 and 0.7 percent next year, up from a July projection of 1.3 percent and 0.6 percent respectively.