The International Monetary Fund said on Wednesday that Japan's real gross domestic product could decline by over 25 percent in the next 40 years due to the aging population.

The IMF said in its annual report that structural reform is essential to "navigate Japan's demographic headwinds".

"IMF staff simulations estimate that the level of real GDP will decline by over 25 percent in about 40 years due to demographics under current policies," the report said.

"The rapid aging and shrinking of Japan's population will dominate economic policymaking in coming decades," it added, noting that although Japan Prime Minister Shinzo Abe's economic policies had brought some positive results in the past six years, strengthened policies are required to achieve sustained high growth and durable reflation.

Among solutions to tackle the demographic issue, the IMF listed reducing wage gaps, encouraging women to join the workforce and allowing more foreign workers to help plug labor shortages.

On Wednesday, the House of Councilors of Japan started the debate on a bill to accept more foreign blue-collar workers after the ruling Liberal Democratic Party pushed it through the lower house of parliament despite rising concerns from the opposition.

It is reported that tens of thousands of workers from other countries will be drafted into industries with staff shortages like electronics, food production, construction and particularly nursing, if the bill is passed.

Chu Yin, a senior research fellow at the Center for China and Globalization, said the IMF had overestimated Japan's economic decline.

"It (Japan's GDP) will drop in the future because of a shrinking population, but it will not drop that much," Chu said.

"For example, if Japan can expand its share in the Chinese market, it will significantly solve its problem of insufficient domestic consumption."

Yoshikazu Kato, adjunct associate professor at Asia Global Institute of the University of Hong Kong, said the Japanese government had made great efforts to deal with the population decline, including having more women in the cabinet, but there are other things can be done.

"Building more internationalized universities to attract talented young people from around the world can be an effective way as the demographic trend intensifies," Kato said. "In this way, students could have time to learn skills and Japanese at the same time to fit better into local society."

The IMF expected the Japanese economy to register 1.1 percent growth this year but slow down to 0.9 percent in 2019 due to the planned consumption tax increase to 10 percent from the current 8 percent in October next year.