The International Monetary Fund urged Japan to keep raising interest rates and avoid loosening fiscal policy further, warning that trimming the consumption tax would erode its capacity to respond to future economic shocks.
The recommendation came as dovish Prime Minister Sanae Takaichi’s landslide election win heightens market attention to whether she will push back against further rate hikes by the central bank. It also follows Takaichi’s pledge to suspend by two years an 8% consumption tax on food sales.
The IMF said the Bank of Japan’s “continued independence and credibility” will help keep inflation expectations well anchored, warning the government against meddling too much in monetary policy.
“The BOJ is appropriately withdrawing monetary accommodation, and gradual hikes should continue to move the policy rate toward neutral,” the IMF said in its preliminary policy recommendation to Japan released on Wednesday.
“As the baseline projection continues to materialize, withdrawal of policy accommodation should continue so that the policy rate reaches a neutral stance in 2027,” it said.
