IMF Says BOJ May Need Faster Rate Hikes if Inflation Surprises

The Bank of Japan is “doing the right thing” by normalising policy and may have to raise rates faster if inflation climbs more than expected, a senior IMF official said in an interview on Friday. Krishna Srinivasan, head of the IMF’s Asia and Pacific Department, said tighter policy would be needed to keep inflation expectations from becoming unanchored, adding that the path is data dependent.

The BOJ lifted its rate to a 31-year high of 1.25% in September after a June hike, and many analysts expect another increase by year-end. Governor Kazuo Ueda said the bank will anchor underlying inflation near 2% and will not tolerate an overshoot. At its meeting later this month, the BOJ could hold rates but hint at a hike, which would support market expectations of a December move.

Yen Weakness and Intervention

A weak yen is adding to inflation by raising the cost of imported raw materials. Japan carried out a rare joint intervention with the US on July 31 to stop the currency’s slide toward near 40-year lows. IMF staff analysis found that much of the yen’s movement since mid-2025 had little to do with fundamentals like yield gaps and tracked speculative positions in yen futures instead. Srinivasan said Japan is fully committed to a freely floating exchange rate.

Japan Fiscal Framework Concerns

Markets are uneasy about how Japan will pay for big spending plans and a two year consumption tax cut starting next April. Srinivasan said Japan has still seen more fiscal consolidation than any other G7 country since the pandemic, helped by higher tax revenues, but a medium-term fiscal framework would ease concerns.