The International Monetary Fund expects the Bank of Japan to gradually raise interest rates toward a neutral setting, even as growth slows. The IMF's World Economic Outlook projects Japan's economy to grow 0.7% in 2026 and stabilize at that level in 2027, partly cushioned by fiscal support and dissipating energy shocks. The report also addressed currency volatility and the role of intervention.
The IMF's forecast for gradual Bank of Japan rate hikes suggests a continued shift away from ultra-loose monetary policy, which could influence global currency markets and the cost of borrowing for Japanese companies and consumers.
The International Monetary Fund anticipates that the Bank of Japan will gradually increase interest rates towards a neutral setting, despite an expected slowdown in economic growth. The IMF's World Economic Outlook projects Japan's economy to expand by 0.7% in 2026, with growth stabilizing at that level in 2027 as fiscal support measures cushion the impact of higher energy prices and the energy shock dissipates.
The Bank of Japan increased its key interest rate to a 31-year high of 1.25% in September, signaling its readiness to continue tightening policy to prevent inflation from exceeding its 2% target. Japan's economy is particularly susceptible to inflation due to its significant reliance on imported fuel and raw materials, exacerbated by a weak currency.
The IMF report also addressed currency volatility, especially in Asia, noting that some countries have intervened in markets. It stated that while flexible exchange rates are generally preferred to absorb external shocks, currency intervention can be considered if market movements become disorderly, if depreciation becomes self-reinforcing, if market liquidity evaporates, or if currency movements threaten price stability through large pass-through effects or balance sheet stress.
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