BOJ may need to tighten faster if inflation beats forecast, IMF says

The International Monetary Fund (IMF) has warned that Japan may need to tighten monetary policy more aggressively if inflation surpasses expectations. A senior IMF official suggested that the Bank of Japan (BOJ) should raise interest rates faster in such a scenario to prevent inflation expectations from becoming unanchored. The IMF's director for the Asia and Pacific Department, Krishna Srinivasan, made these remarks in response to the BOJ's efforts to normalize monetary policy.

Srinivasan emphasized that the BOJ is currently doing the right thing by normalizing policy rates and indicated that further tightening could be necessary if inflation exceeds forecasts. He also stressed that the decision to tighten would depend on the available data and would be aimed at avoiding an unanchored rise in inflation expectations.

The IMF's concerns stem from several factors, including the impact of the Middle East conflict on inflation and the surge in demand for artificial intelligence (AI) technologies. Japan's economic challenges were also highlighted, with the government's large spending plans and a forthcoming reduction in the consumption tax raising concerns among markets about fiscal risks.

Despite these challenges, Japan has demonstrated fiscal consolidation more than any other G7 country since the pandemic, largely due to rising tax revenues.

The IMF's assessment comes ahead of the BOJ's upcoming policy meeting, where it could choose to maintain current rates or signal a potential rate hike in December. BOJ Governor Kazuo Ueda, who participated in the IMF meetings, reiterated the central bank's commitment to anchoring underlying inflation around its 2% target and warned against any overshooting, reaffirming its determination to continue raising interest rates.