–Updates with Official Remarks at Briefing, Background
–IMF: BOJ Policy Interest Rate Below Estimated Neutral Rate, Echoing Recent Comments of BOJ Governor Ueda
–IMF: Continued Unwinding of Monetary Stimulus to Lift BOJ’s Overnight Rate to Neutral In 2027
–IMF Advises Against Lowering 10% Sales Tax, Hails PM Takaichi Plan to Suspend it for 2 Years Only on Groceries
By Max Sato
(MaceNews) – The Bank of Japan needs to continue unwinding the excess stimulus from its past easing for about a year to raise its policy interest rate to a level deemed neutral to economic activity, the International Monetary Fund said in a report on Tuesday, echoing the BOJ’s own view.
Later, IMF senior economist and Japan mission chief Rahul Anand told reporters that the BOJ is expected to increase its policy rate to 1.5% through two hikes this year and one next year, each at a gradual pace of 25 basis points (0.25 percentage point).
The Washington-based lender and policy adviser also endorsed the government plan to suspend the 10% sales tax on groceries for two years. Prime Minister Sanae Takaichi, who led the conservative ruling Liberal Democratic Party to a historic landslide win in general elections on Feb. 8 with promises of large-scale fiscal projects and tax breaks.
The fund’s reports are rarely at odds with its member countries because its staff writes them after being briefed by senior officials at the governments and central banks of the target economies during their routine visits. If those reports sound like a broken report, it is due to the organization’s deep-rooted advocacy for balancing the budget.
The IMF briefly touched upon the dollar-yen foreign exchange rate without mentioning specific levels as the yen remains weak, keeping import costs high and limiting the spending power of many Japanese households.
Asked whether ¥100 to the dollar is a reasonable level for Japanese households and businesses, Anand told an online briefing that “there is no right level” that the IMF could recommend. In the report, the fund said that “flexible exchange rates” should continue to help absorb external shocks and support monetary policy’s focus on price stability.
Data has shown that the yen’s depreciation, for example to the recent range of ¥150 to ¥160, does not boost Japan’s export volumes very much because many firms have already shifted their factories closer to key consumer markets overseas. At the same time, Japanese exporters have survived a much stronger yen around its record high level of ¥75.54. Judging from past remarks and parliamentary testimony by politicians, Japanese policymakers appear to be comfortable if the dollar-yen exchange rate remains stable in a range from around ¥105 to about ¥115, or in a wider ¥100 to ¥120 range.
“The BOJ is appropriately withdrawing monetary accommodation, and gradual hikes should continue to move the policy rate toward neutral,” the fund said. “The current policy rate remains below staff’s estimate for the neutral rate, which is subject to significant uncertainty given Japan’s prolonged period of policy rates at or near the effective lower bound.”
“As the baseline projection continues to materialize, withdrawal of policy accommodation should continue so that the policy rate reaches a neutral stance in 2027,” the IMF concluded.
For his part, BOJ Governor Kazuo Ueda told reporters in December that the board would discuss the need to raise rates further, taking “one meeting at a time” and that its policy decisions would be “data- and information-dependent.”
After the bank’s latest action to raise rates at its Dec. 18-19 meeting, the short-term rate at 0.75% is “still slightly below the lower end of the estimated neutral rate,” he said, referring to the evasive measure often described as a moving target that is neither too stimulative nor too restrictive to economic activity.
At its latest meeting on Jan. 22-23, the BOJ’s nine-member board decided in an 8 to 1 vote to leave the target for the overnight interest at 0.75% after conducting its first rate hike in six meetings in December by raising it by 25 basis points (0.25 percentage point) to a 30-year high. The no change in policy was expected as the bank stays the course of lifting the policy rate only gradually toward a more neutral level of at least 1%.
Board member Hajime Takata, formerly with Mizuho Securities, called for a back-to-back rate increase to 1.0%, arguing that the bank’s 2% inflation target has been “largely achieved” and that there are “high upside risks” to domestic inflation as other economies are entering a recovery phase. Takata and his colleague Naoki Tamura, who came from the Sumitomo Mitsui banking group, were advocates for an earlier rate hike before December.
The IMF called a gradual pace of policy normalization “appropriate” to support the re-anchoring of inflation expectations at the BOJ’s price stability target of around 2% in the long run, arguing that expectations are shaped by Japan’s long history of low inflation. It also described the bank’s flexible and data-dependent approach as “appropriate” in the face of heightened uncertainty over external conditions, the neutral rate and the slow pace of monetary policy affecting the economy.
The fund said the dollar-yen exchange rate tracked the U.S.-Japan yield differential in recent years but that it has consistently decoupled since mid-2025. “Observed positions in the yen futures market have been associated with yen movements that are not accounted for by yield differentials,” it noted.
The IMF sounded more cautious about Japan’s near-term growth prospects by saying risks to the outlook are “tilted to the downside” amid deepening geoeconomic fragmentation and the protectionist U.S. trade policy that could disrupt supply chains and dampen business sentiment. “An abrupt deterioration of financial conditions could weaken confidence and domestic demand,” it added. “Domestically, the main risk remains weak consumption if real wage growth fails to turn positive.”
In its quarterly Outlook Report released after the January meeting, the BOJ said risks to both economic activity and prices are “generally balanced.”
As for risks to inflation, the IMF also said they are “balanced.” On the downside, weaker-than-expected wage growth could weigh on price momentum and revert recent gains in re-aligning inflation expectations with target, it said. On the upside, more expansionary fiscal policy could boost demand pressures.
On the fiscal front, the fund told Tokyo to “avoid reducing the consumption tax, an untargeted measure that would erode fiscal space and add to fiscal risks.” Instead, it recommended that support for vulnerable households and firms most affected by rising costs of living or large external shocks “should be budget neutral, temporary, and targeted to these groups.”
Prime Minister Takaichi has called for waiving the 10% sales tax (8% for newspapers and foodstuffs excluding eating out and alcohol) on food and beverages for two years. Takaichi has said the government will try to find funds by reviewing subsidies and other special tax measures so that it avoid issuing additional bonds but it remains uncertain as the government also plans to increase defense spending and it has less tax revenue after ending decades of top-up taxes on gasoline and diesel oil at the end of 2025.
“Limiting the consumption tax cut to essential goods and ensuring it is temporary would help contain fiscal costs,” the IMF said.