IMF sees gradual Bank of Japan rate hikes toward neutral

what happened

Newsmetry API reports that the International Monetary Fund expects the Bank of Japan to raise interest rates gradually toward a “neutral setting” despite slower growth. The IMF projects Japan’s economy will expand by 0.7% in 2026, following 1.2% growth last year, and by 0.7% again in 2027. Fiscal support is expected to cushion part of the impact of higher energy prices, while growth stabilises as the energy shock fades and monetary policy normalises.

The BOJ lifted rates to a 31-year high of 1.25% in September and signalled that it was prepared to continue tightening to prevent inflation from overshooting its 2% target. Japan’s strong dependence on imported fuel and raw materials leaves the economy especially exposed to the inflationary effects of the energy shock and a weaker yen.

The IMF said central banks can look through direct and short-term indirect inflation effects only when a shock is temporary. If inflation expectations rise, however, nominal rates may need to increase to keep real borrowing costs steady. The report also noted high exchange-rate volatility, particularly in Asia, and said temporary intervention could be considered when market moves become disorderly, liquidity disappears, price stability is threatened or balance-sheet stress intensifies.

why it matters

The IMF’s assessment reinforces expectations of further BOJ tightening while highlighting currency risks. Its comments on intervention also show how energy costs, yen weakness and volatile markets may shape policy decisions.

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