Overview
A senior International Monetary Fund official said the Bank of Japan is taking the correct approach in normalising monetary policy but may have to move more quickly on rate hikes if inflation accelerates beyond forecasts. The official also urged Japan to clarify financing for its sizeable spending package and to provide a medium-term fiscal framework to help alleviate market unease about fiscal risks.
IMF perspective on BOJ policy
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told Reuters that the central bank is "doing the right thing" as it lifts its policy rate toward levels economists view as neutral for the economy. On the prospect of a faster tightening cycle, he said: "If inflation rises faster than expected, you have to start tightening faster because you don’t want inflation expectations to get un-anchored. It’s data dependent."
Those remarks were delivered ahead of a key BOJ policy meeting later this month, where the bank could opt to hold rates steady while signalling a firmer hawkish stance - a move that would dovetail with widespread market expectations of a rate increase in December.
Inflationary pressures under discussion
Participants at this week’s IMF meetings in Bangkok highlighted several sources of upward pressure on inflation, including fallout from the conflict in the Middle East and elevated demand tied to artificial intelligence projects. BOJ Governor Kazuo Ueda, who attended the IMF gatherings, reiterated the central bank’s commitment to anchoring underlying inflation close to its 2% target and said it "won’t tolerate any overshoot," reaffirming the bank’s determination to continue raising interest rates.
Exchange rate and recent market interventions
Srinivasan noted that a weaker yen has been adding to inflation by raising the cost of imported raw materials. The combination of mounting price pressures and exchange-rate dynamics helped push the BOJ to raise rates to 1.25% in September - a 31-year high - following an earlier increase in June. Many analysts anticipate another hike by year-end.
Japan undertook a rare, coordinated intervention with the United States on July 31 to stem a slide in the yen toward near 40-year lows that could have destabilised financial markets. In its staff analysis on Asia’s economy, the IMF found that a significant portion of the yen’s moves since mid-2025 were not explained by fundamentals such as yield differentials, but instead moved in line with speculative positions in yen futures.
Addressing whether the intervention was justified, Srinivasan said Japan has a deep foreign exchange market and had allowed the exchange rate to move as a first line of defence. He added: "Bottom line, I would say that the Japanese authorities are fully committed to a freely floating exchange rate. I’ve had many discussions with them. So I don’t doubt that at all."
Fiscal concerns and the need for a medium-term framework
Rising global bond yields were another focus at the IMF meetings, underscoring investor attention on elevated debt levels in advanced economies, including Japan, after extended periods of heavy spending. Markets are wary that Tokyo’s planned policy measures - including a large spending agenda and a two-year reduction in the consumption tax starting in April next year - could add to Japan’s already substantial debt burden.
Srinivasan observed that Japan has nonetheless achieved more fiscal consolidation since the pandemic than any other G7 country, partly driven by rising tax revenues. But he cautioned that "markets are concerned about the fiscal risks because of the uncertainty" surrounding how the country would finance the new spending and the planned tax cut. He recommended that "Japan also would benefit from having a medium-term fiscal framework."
What to watch
- Outcomes and language from the BOJ’s upcoming policy meeting later this month, which could shape expectations for a December rate move.
- Inflation data and exchange-rate developments, particularly the yen’s trajectory and import-price effects.
- Any further fiscal details from Tokyo that clarify the funding plan for new measures and the proposed temporary tax cut.
Summary prepared for readers tracking central bank policy, exchange rates and fiscal risk in Japan. The article reflects comments made by IMF officials and public statements from the BOJ and its governor at recent international meetings.