The International Monetary Fund said on Tuesday it expects the Bank of Japan to increase interest rates gradually, and slightly faster than the fund projected six months earlier.
In its World Economic Outlook report the IMF left its growth forecasts for Japan mostly intact. After a 1.2% expansion in 2025, the fund projects growth will slow to 0.7% in 2026 and to 0.6% in 2027, figures that it described as roughly unchanged from its October outlook.
The report noted that domestic policy measures - including the government's fiscal stimulus package and steps to curb household fuel bills - should help offset headwinds from weaker overseas demand and disruptions stemming from the conflict in the Middle East.
On inflation, the IMF anticipates a moderation this year with consumer prices converging toward the Bank of Japan's 2% target by the end of 2027 as food and commodity prices ease.
The report included a direct projection for monetary policy: "In Japan, the policy rate is projected to gradually rise, at a slightly steeper clip than thought in October 2025, toward a neutral setting of about 1.5%," the report added. The IMF had previously, in October, expected the BOJ to raise rates gradually toward a neutral setting of around 1.5%.
Policy actions over the past year have tightened financial conditions after the BOJ exited a massive stimulus programme in 2024. The bank raised its short-term policy rate several times, including in December when it took it to a 30-year high of 0.75%.
Recent surges in oil prices linked to the Middle East conflict have complicated the central bank's path toward higher rates. The IMF highlighted that rising fuel costs both add to inflationary pressures and weigh on Japan's modest economic recovery, given the country's substantial oil import dependence on the region.
Consumer inflation in Japan has hovered around the BOJ's target for nearly four years, and BOJ Governor Kazuo Ueda has signalled readiness to continue raising rates. Market participants have focused on the possibility of another BOJ move at the central bank's policy meeting on April 27-28, though the IMF noted that the prospect of a near-term hike has dimmed as the protracted Iran war keeps markets volatile and clouds the economic outlook.
Summary
The IMF expects the BOJ to lift rates gradually, at a somewhat quicker pace than six months ago, while leaving growth forecasts little changed. Policy support and fuel relief should offset external and geopolitical headwinds. Inflation is expected to moderate and reach the BOJ's 2% target by end-2027.