The International Monetary Fund has called on the Bank of Japan to continue raising interest rates, while noting that the war in the Middle East poses "significant new risks" to Japan's economic outlook. The IMF's recommendation comes as markets expect the central bank to lift rates as soon as April amid rising inflationary pressure driven by conflict-related oil price increases and higher import costs tied to a weaker yen.
In a statement released from Washington on Friday after completing its policy consultation with Japan, the IMF said that although growth is likely to moderate - in part due to the Iran war - gradual wage gains should help underpin household consumption.
"Risks to the outlook and inflation are broadly balanced," the IMF said, adding that it expects inflation to converge to the BOJ's 2% target in 2027. The statement said the IMF's executive board commended Japan's "strong economic resilience" to global shocks and agreed that the BOJ is appropriately withdrawing monetary accommodation.
The IMF urged that, "as underlying inflation converges toward the BOJ's target, gradual rate hikes toward neutral should continue" using a flexible, well-communicated and data-dependent approach. Directors also emphasized the need to preserve a flexible exchange rate so it can act as a credible shock absorber.
Policy actions taken last year are a backdrop to the IMF's recommendations. The BOJ ended a period of massive stimulus in 2024 and has raised interest rates several times, including in December, on the view that Japan was nearing a persistent 2% inflation outcome. The central bank has repeatedly stressed its readiness to continue lifting rates based on the expectation that underlying inflation will move toward the 2% goal sometime from the second half of fiscal 2026 into fiscal 2027. The Japanese fiscal year begins in April.
Rising oil prices are a particular concern for Japan's import-dependent economy, the IMF noted, with BOJ policymakers signalling that higher energy costs could add to inflationary pressures already building from years of steady wage gains and broader price increases. Those signals, together with the BOJ's generally hawkish rhetoric, have led markets to assign roughly a 70% probability to a rate increase in April.
The yen's depreciation toward the psychologically important 160-per-dollar mark has also raised the specter of currency intervention. Finance Minister Satsuki Katayama on Friday issued a renewed warning to speculators betting against the yen, saying that Japan stands ready to act against speculative moves in the currency market.
"We re ready to take all available means that are legally feasible, be it conventional or non-conventional," she said on an online programme on Friday evening.
Implications and context
The IMF's guidance frames a policy path in which the BOJ continues to remove accommodation in a measured way while watching for downside risks to growth from geopolitical developments. The statement reinforces the central bank's recent trajectory and the government's willingness to counter disorderly currency moves if necessary.