IMF: BOJ May Need Faster Tightening If Inflation Beats Forecast

BANGKOK — The Bank of Japan is "doing the right thing" by normalising monetary policy, but may need to raise interest rates faster if inflation exceeds expectations, a senior International Monetary Fund official said, sharpening the policy signal ahead of the BOJ's meeting later this month.

Krishna Srinivasan, director of the IMF's Asia and Pacific Department, told Reuters the central bank's efforts to lift its policy rate toward levels deemed neutral to the economy are appropriate so far. The qualification: if price pressures build more than projected, the BOJ will have to move more quickly.

"If inflation rises faster than expected, you have to start tightening faster because you don't want inflation expectations to get un-anchored," Srinivasan said in an interview on Friday. "It's data dependent."

The remarks came as policymakers gathered in Bangkok for the annual IMF meetings, where inflationary pressures from the Middle East conflict and brisk AI demand were key themes. They also land ahead of the BOJ's upcoming policy meeting, at which the central bank could hold rates steady while dropping hawkish hints that would reinforce dominant market expectations of a December hike.

BOJ Governor Kazuo Ueda, who attended the IMF meetings, said on Friday the central bank will focus on anchoring underlying inflation around its 2 percent target and will not tolerate an overshoot, stressing anew its resolve to continue raising interest rates.

**Yen, Inflation Pressures**

For Japan, a weak yen adds to upward price pressure by boosting the cost of raw material imports. Those mounting price pressures prodded the BOJ to raise rates to a 31-year high of 1.25 percent in September, following a hike in June. Many analysts expect another rate increase by year-end.

Japan also conducted a rare, coordinated intervention with the United States on July 31 to prevent the currency's slide to near 40-year lows from destabilising financial markets.

In staff analysis included in its report on Asia's economy, the IMF said a big portion of yen moves since mid-2025 had little to do with fundamental factors such as yield differentials, and instead co-moved with speculative positions in yen futures.

Srinivasan defended Japan's approach to currency management, saying the authorities have allowed the exchange rate to move as a first line of defense given the country's deep foreign exchange market.

"Bottom line, I would say that the Japanese authorities are fully committed to a freely floating exchange rate," he said when asked whether the recent yen intervention was justified. "I've had many discussions with them. So I don't doubt that at all."

**Fiscal Framework Needed**

Rising global bond yields have also drawn attention at this week's IMF meetings as debt in advanced economies, including Japan, expanded after years of heavy spending.

Markets worry that Japan may add to its already enormous debt pile with the administration's big spending plans and a two-year cut to the consumption tax from April next year. Srinivasan said Japan has in fact seen fiscal consolidation proceed more than any other G7 country since the pandemic, due in part to rising tax revenues.

"Markets are concerned about the fiscal risks because of the uncertainty" of how Japan would pay for the fresh spending and tax-cut plans, he said.

Srinivasan added that clarity on funding would help reassure investors. "Japan also would benefit from having a medium-term fiscal framework."