Japan should gradually raise interest rates while keeping fiscal support targeted, a senior official from the International Monetary Fund said on Thursday, highlighting resilience in the country’s domestic economy.
The remarks come ahead of the Bank of Japan’s upcoming policy meeting later this month, where policymakers are expected to assess economic headwinds alongside inflationary pressures linked to the ongoing Middle East conflict.
IMF flags resilience in the domestic economy
“Growth has held up quite well in Japan,” Krishna Srinivasan, director for the IMF’s Asia Pacific Department, said, as cited in a Reuters report.
He pointed to strong domestic demand, improving wage growth, and robust outcomes from annual wage negotiations as key drivers supporting the economy.
Srinivasan added that wage growth has turned positive, reflecting stronger income conditions for households.
These developments, he said, are helping sustain consumption and broader economic momentum despite global uncertainties.
Srinivasan emphasised that monetary policy adjustments should be gradual and guided by incoming economic data.
Gradual rate hikes recommended
As quoted in a Reuters report, Srinivasan said, “Our advice to the BOJ is … to be data dependent and gradually start increasing rates going forward”.
His comments suggest a cautious but steady shift away from Japan’s long-standing ultra-loose monetary policy stance.
The IMF expects inflation to move towards the BOJ’s 2% target over the medium term, with Srinivasan noting that price growth is likely to converge to this level by 2027.
The timing of the remarks is significant, as the BOJ prepares for its policy review later this month.
Officials are expected to weigh domestic economic strength against external risks, including inflationary pressures stemming from geopolitical tensions in the Middle East.
Fiscal policy should remain targeted
On fiscal policy, Srinivasan urged the Japanese government to act prudently.
He recommended that any fiscal measures be carefully targeted and that existing fiscal buffers be used “wisely,” .
Japan has already introduced subsidies aimed at reducing gasoline and utility costs to shield households from rising living expenses.
However, these measures add to the country’s already elevated debt levels, raising concerns about long-term fiscal sustainability.
The IMF’s stance indicates a preference for limited, well-directed fiscal intervention rather than broad-based stimulus, particularly at a time when domestic demand remains relatively strong.
Policy debate intensifies ahead of BOJ meeting
The policy outlook is further complicated by the stance of Prime Minister Sanae Takaichi, who has traditionally supported expansionary fiscal and monetary policies.
Takaichi has proposed increasing government spending to boost economic growth and has previously expressed reservations about the BOJ’s plans to raise interest rates.
Her position underscores the ongoing debate within Japan over the appropriate balance between supporting growth and managing inflation.
As the BOJ’s policy meeting approaches, markets and policymakers alike will be closely watching how these competing priorities are addressed.
The central bank’s decision will likely hinge on whether domestic strength can offset external risks while keeping inflation on track toward its target.
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