BOJ may need to tighten faster if inflation beats forecast, IMF says
TLT•An IMF official said the Bank of Japan may need to raise interest rates faster if inflation exceeds expectations. He also urged Japan to clarify how it will fund spending plans and set out a medium-term fiscal framework.
1. Rate policy and inflation
The Bank of Japan is “doing the right thing” by normalising monetary policy, IMF Asia and Pacific Department Director Krishna Srinivasan said. He said the BOJ may need to tighten faster if inflation rises more than expected, to keep inflation expectations anchored, and described its approach as data dependent. The BOJ raised its policy rate to 1.25% in September after a June hike; many analysts expect another increase by year-end.
2. Yen and fiscal concerns
IMF staff analysis said much of the yen’s movement since mid-2025 had little to do with fundamentals such as yield differentials and instead moved with speculative positions in yen futures. Srinivasan said Japan was committed to a freely floating exchange rate. He also said uncertainty over funding for new spending and tax-cut plans was causing market concern, and that Japan would benefit from a medium-term fiscal framework.
