IMF Urges BOJ Gradual Rate Hike Amid Global Uncertainty

IMF Advocates Cautious Approach to Rate Hikes in Japan

A senior official at the International Monetary Fund (IMF) on Wednesday expressed concern about the uncertainty clouding global trade and its impact on the outlook for the Japanese economy. Consequently, the official emphasized the necessity for the Bank of Japan (BOJ) to maintain a highly accommodative monetary policy, with interest rate increases implemented at a very gradual pace.

Nada Choueiri, Deputy Director of the IMF's Asia and Pacific Department, noted that the Japanese economy has shown resilience this year, outperforming expectations thanks to robust consumer spending and exports. The trade agreement between Japan and the United States has also contributed to easing some uncertainties.

However, Choueiri cautioned that downside risks remain, driven by persistent trade tensions and the potential for a reversal in accommodative global financial conditions. These combined factors create an uncertain environment for Japanese economic growth.

Challenges Facing the Japanese Economy

Choueiri also highlighted the uncertainty surrounding Japan's ability to achieve sustained wage growth, which is crucial for supporting consumer spending and stabilizing inflation near the BOJ's 2% target. She stressed the importance of a gradualist approach to monetary policy, given the current level of uncertainty. This was stated on the sidelines of the IMF and World Bank annual meetings in Washington.

In response to a question about the prevailing market expectation that the BOJ might raise interest rates again by next January, Choueiri emphasized the importance of maintaining a very gradual pace and closely monitoring all incoming data.

Future Monetary Policy of the BOJ

The BOJ is scheduled to hold its next monetary policy meeting on October 29-30, followed by further meetings in December and next January. It is worth noting that last year, the BOJ exited a decade-long massive stimulus program. In January of this year, the central bank raised its key interest rate to 0.5%, citing that Japan was nearing its 2% inflation target and was expected to sustain it in the long term.

Although BOJ Governor Kazuo Ueda has signaled the bank's readiness to continue raising interest rates, he has emphasized the need to proceed cautiously and closely observe the impact of U.S. tariffs on the Japanese economy.

The persistent rise in food prices, partly attributed to the weakening yen which has increased import costs, is placing the BOJ in a difficult position regarding the timing of interest rate hikes. In September, two of the central bank's nine-member policy board proposed raising interest rates, but the proposal was not passed. This detail reveals a growing concern among policymakers about the broadening scope of inflationary pressures.

Choueiri believes that the risks facing the price outlook are relatively balanced and that the pass-through effect of the weaker yen on inflation is limited. She added that she does not see any worrying signs of overheating, either in terms of consumer spending or core inflation. As a result, Choueiri does not agree with the view that the BOJ is falling behind the curve in responding to inflation trends.

Political and Fiscal Risks

In addition to economic risks, the fragile Japanese economy faces additional risks stemming from political uncertainty. Last week, Sanae Takaichi, the new leader of the ruling party, faced a setback in her bid to become Japan's first female prime minister, as the ruling party's coalition partner announced its withdrawal.

Furthermore, public dissatisfaction with rising inflation contributed to the ruling party's loss in the upper house elections in July. In response, both the ruling and opposition parties have proposed increased spending to alleviate economic pressures on households.

Choueiri emphasized that since Japan already carries a significant burden of public debt, it is essential that the country develops a plan for fiscal consolidation and ensures that all spending plans are temporary and targeted towards low-income households.

Choueiri concluded by stating that once food prices stabilize and inflation ceases to rise, these support measures should be discontinued. She asserted that proposals such as value-added tax (VAT) reductions or indiscriminate subsidies are not beneficial options for Japan at this stage, as they would significantly increase the deficit burden.