IMF urges Japan to keep raising interest rates

The Bank of Japan should remain data-driven and continue to raise interest rates gradually in line with inflation data, the International Monetary Fund said on Thursday, adding that the central bank is on track to return price increases to its 2% annual target.

“Our advice to the Bank of Japan is that it should continue to be data-driven and gradually raise the policy rate over its policy horizon, if inflation expectations confirm that this is the right way to go,” IMF spokeswoman Julie Kozack said at a regular news briefing.

Japan’s new Prime Minister Shigeru Ishiba said on Wednesday that Japan was not in an environment that required additional interest rate hikes, a comment that markets interpreted as reducing the chances of a near-term hike. Ishiba also pledged new fiscal measures to protect many households from the impact of rising prices.

Kozack said Japan’s economy continues to grow, but broad-based price increases are keeping headline inflation above the BOJ’s 2% target.

“Our assessment is that the economy remains on track to sustainably achieve the 2% target over the medium term,” Kozak added.

Japanese fiscal policy should focus on fiscal consolidation “in a growth-friendly manner” to help rebuild buffers and ensure debt sustainability, she said.

Kozak explained that such fiscal consolidation could be anchored in revenue and spending measures, and would help maintain market confidence in the sustainability of Japanese debt, “which is of course essential for Japan’s growth.”