TOKYO, June 20 (Reuters) - Japan's flexible exchange rate system serves the economy well and the government should rely on domestic policies, such as fiscal and monetary policy, to improve the output gap, an International Monetary Fund official said on Monday.

David Lipton, first deputy managing director of the IMF, also said that he understood the Japanese government's decision to delay a sales tax increase originally scheduled for next year but that the government would eventually have to raise taxes.

(Reporting by Tetsushi Kajimoto and Stanley White; Editing by Chang-Ran Kim)