IMF: Bank of Japan must tighten faster if inflation runs higher
Japan's central bank is right with its rate hikes, says IMF Asia chief Srinivasan. But if inflation rises faster than expected, it must do more. Governor Ueda says he will not tolerate an overshoot.
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The International Monetary Fund sees scope for a faster tightening of Japanese monetary policy. If inflation rises faster than expected, the Bank of Japan must also raise interest rates faster to anchor inflation expectations, Krishna Srinivasan, director of the IMF's Asia and Pacific Department, said on Friday in an interview with Reuters on the sidelines of the annual meetings in Bangkok. The central bank's course toward a neutral interest rate level is right, but it depends on the data, he said.
The Bank of Japan raised its key interest rate to 1.25% in September, the highest level in 31 years. According to Reuters, it could leave rates unchanged at its meeting at the end of October but signal a hike in December. Governor Kazuo Ueda said the central bank would not tolerate inflation overshooting its 2% target. Price drivers include the conflict in the Middle East, strong AI-related demand and the weak yen, which makes commodity imports more expensive.
Japan and the United States intervened in the currency market on July 31 in a rare joint action to stop the yen's slide. Srinivasan said Japan is fully committed to floating exchange rates. Markets are also worried about high government debt and a planned two-year cut in the consumption tax starting in April. The government should clarify how it intends to finance spending and tax plans and adopt a medium-term fiscal framework, the IMF official said.