IMF Warns BOJ May Need Faster Tightening if Inflation Overshoots, Pressuring Yen

The Bank of Japan may need to accelerate its interest rate increases if inflation rises more than expected, a senior International Monetary Fund official said, reinforcing expectations that the central bank’s tightening cycle is far from over.

Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told Reuters the BOJ is “doing the right thing” by normalising monetary policy. But he cautioned that if price pressures overshoot forecasts, the central bank would have to tighten faster to prevent inflation expectations from becoming unanchored. “It’s data dependent,” he said in an interview on Friday, speaking on the sidelines of the annual IMF meetings in Bangkok.

The remarks come ahead of the BOJ’s policy meeting later this month. While the central bank is widely expected to keep rates steady at that gathering, it could offer hawkish hints that reinforce market expectations of a rate increase in December. Many analysts already anticipate another hike by year-end.

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

Inflationary pressures from the Middle East conflict and brisk AI-driven demand were among key themes discussed by policymakers at the IMF meetings. For Japan, a weak yen adds to upward price pressures by boosting the cost of raw material imports.

The BOJ has already responded to mounting price pressures. It raised its policy rate to 1.25% in September—the highest level in 31 years—following an earlier hike in June. Japan also conducted a rare coordinated currency intervention with the United States on July 31 to prevent the yen’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 large 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 overall exchange rate policy, saying Japanese authorities are fully committed to a freely floating currency. “Japan has a deep foreign exchange market, so as a first line of defense, they have allowed the exchange rate to move,” he said. When asked whether recent yen intervention was justified, 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 framework needed**

Rising global bond yields have also drawn attention at the IMF meetings, as debt in advanced economies including Japan expanded after years of heavy spending. Markets worry that Japan could add to its already huge debt pile with the administration’s big spending plans and a two-year cut to the consumption tax from April next year.

Srinivasan noted that Japan has actually seen fiscal consolidation proceed more than any other Group of Seven country since the pandemic, partly due to rising tax revenues. But he stressed that “markets are concerned about the fiscal risks because of the uncertainty” over how Japan would pay for the fresh spending and tax-cut plans.

“Japan also would benefit from having a medium-term fiscal framework,” he said.

The combination of a potential faster monetary tightening path and unresolved fiscal uncertainty could keep the yen under pressure, as investors weigh the BOJ’s rate trajectory against the country’s widening fiscal imbalance. The IMF’s warning adds to the argument that the BOJ may need to move more aggressively if inflation proves sticky—raising the stakes for its upcoming policy decision.