BOJ may need to tighten faster if inflation beats forecast, IMF says
TLT•The BOJ may need to raise interest rates faster if inflation rises more than expected, an IMF official said. He also urged Japan to clarify how it will fund planned spending and establish a medium-term fiscal framework.
1. Rate policy and inflation
The Bank of Japan is “doing the right thing” by normalising monetary policy and may need to raise rates faster if inflation exceeds expectations, Krishna Srinivasan, director of the IMF's Asia and Pacific Department, told Reuters. He said the approach should remain data-dependent and warned against inflation expectations becoming unanchored. Japan's inflation pressures include higher import costs linked to a weak yen; the BOJ raised its policy rate to 1.25% in September after a June hike.
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 alongside speculative positions in yen futures. Srinivasan said Japan was committed to a freely floating exchange rate. He also said uncertainty over funding for planned spending and consumption-tax cuts concerned markets, and that Japan would benefit from a medium-term fiscal framework.
