A senior IMF official says the Bank of Japan is doing the right thing by normalising policy but may need to raise rates faster if inflation rises more than expected. He also urged Japan to clarify how it will fund its spending plans.
The Bank of Japan may need to raise interest rates faster if inflation rises more than expected, Krishna Srinivasan, director of the IMF's Asia and Pacific Department, told Reuters. Srinivasan said the central bank is lifting its policy rate towards levels deemed neutral to the economy.
According to Reuters, Srinivasan said: "I would say that they are doing the right thing at this point" on the BOJ's efforts. He added that the path is data dependent, and that you don't want inflation expectations to get un-anchored.
BOJ meeting and December hike bets
The remarks came ahead of the BOJ's policy meeting later this month, when it could keep rates steady but drop hawkish hints. Such hints would reinforce market expectations of a December hike.
Governor Kazuo Ueda, who attended the IMF meetings in Bangkok, said the bank will focus on anchoring underlying inflation around its 2% target and won't tolerate any overshoot. Mounting price pressures prodded the BOJ to raise rates to a 31-year high of 1.25% in September, following a hike in June.
Weak yen adds to price pressure
For Japan, a weak yen adds to inflation by boosting the cost of raw material imports. Japan also conducted a rare, coordinated currency intervention with the US on July 31 to prevent the currency's slide to near 40-year lows from destabilising financial markets.
In staff analysis, the IMF said a big portion of yen moves since mid-2025 had little to do with fundamental factors such as yield differentials. Instead, they co-moved with speculative positions in yen futures.
IMF calls for a fiscal framework
Srinivasan said Japan must lay out a medium-term fiscal framework to ease market concerns about fiscal risks. Markets worry that Japan may add to its debt pile with big spending plans and a two-year cut to the consumption tax from April next year.
Source: Economy News
Trading involves risk.
Risk Disclaimer
