IMF warns BOJ may need faster rate hikes if inflation overshoots; urges fiscal framework

BANGKOK — The Bank of Japan may need to raise interest rates faster than currently planned if inflation rises more than expected, a senior International Monetary Fund official said, as policymakers gathered in Bangkok for the IMF's annual meetings.

Krishna Srinivasan, director of the IMF's Asia and Pacific Department, said the BOJ's efforts to lift its policy rate toward neutral levels are appropriate but stressed the path depends on data.

"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," he told Reuters in an interview on Friday.

"I would say that they are doing the right thing at this point," Srinivasan said of the central bank's normalization campaign.

The remarks come ahead of the BOJ's policy meeting later this month. Analysts widely expect the central bank to keep rates steady at that meeting but deliver hawkish guidance that could reinforce expectations of a hike in December.

BOJ Governor Kazuo Ueda, who attended the IMF meetings, said Friday the central bank will focus on anchoring underlying inflation around its 2% target and will not tolerate any overshoot, reiterating its resolve to keep raising rates.

Mounting price pressures have already pushed the BOJ to act. The central bank raised rates to a 31-year high of 1.25% in September, following an increase in June. Many analysts expect another rate hike by year-end.

A weak yen has added to inflationary pressures by boosting the cost of imported raw materials. To stem the currency's slide, Japan conducted a rare coordinated intervention with the United States on July 31, after the yen approached 40-year lows.

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

"Japan has a deep foreign exchange market, so as a first line of defense, they have allowed the exchange rate to move," Srinivasan said. Asked whether the recent yen intervention was justified, he said: "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."

Inflationary pressures stemming from the Middle East conflict and brisk demand tied to artificial intelligence were among key themes discussed at this week's IMF meetings.

Fiscal framework needed

Beyond monetary policy, Srinivasan urged Japan to clarify how it plans to fund its large spending plans and to establish a medium-term fiscal framework to ease market concerns about fiscal risks.

Rising global bond yields have drawn attention at the IMF meetings as debt in advanced economies, including Japan, has expanded after years of heavy spending. Markets worry that Japan may add to its already sizable debt pile with the administration's big spending initiatives and a two-year cut to the consumption tax scheduled to begin in April next year.

Srinivasan noted that Japan has actually achieved more fiscal consolidation than any other Group of Seven country since the pandemic, partly because of rising tax revenues. But uncertainty remains.

"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. "Japan also would benefit from having a medium-term fiscal framework."