The International Monetary Fund (IMF) has advised Japan to continue raising interest rates and refrain from further loosening fiscal policy. This recommendation comes amidst heightened market scrutiny following Sanae Takaichi’s election win and her pledge to suspend the consumption tax on food sales for two years. The IMF cautioned that reducing the consumption tax would diminish Japan’s capacity to respond to future economic shocks.
The IMF stressed the importance of the Bank of Japan’s (BOJ) independence and credibility in maintaining stable inflation expectations, cautioning against excessive government intervention in monetary policy. The IMF anticipates the BOJ will raise rates twice this year and again in 2027, aligning with the central bank’s signals of readiness to continue hiking rates after exiting its massive stimulus programme in 2024. The BOJ, which serves as Japan’s central bank, is responsible for monetary policy. The International Monetary Fund, or IMF, promotes international financial stability and monetary cooperation.
The fund highlighted that higher borrowing costs could complicate Takaichi’s tax cut and spending plans, which previously triggered bond and yen sell-offs due to concerns about Japan’s financial stability. The IMF also noted that Japan’s high debt levels and deteriorating fiscal balance expose the economy to various shocks, projecting a doubling of interest rate payments between 2025 and 2031 as debt is rolled over at higher yields.
Furthermore, the IMF advised Japan to closely monitor market liquidity and shifting investor demand as the BOJ reduces its balance sheet and tapers bond buying. It welcomed the authorities’ commitment to a flexible exchange rate regime, noting that exchange rate flexibility should help absorb external shocks and support the monetary policy’s focus on price stability.
