IMF Backs Further BOJ Rate Hikes Despite Iran War Risks to Japan Economy

Tokyo — The International Monetary Fund on Saturday urged the Bank of Japan to continue raising interest rates in a gradual manner, even as the Iran war introduces significant new risks to Japan’s economic outlook through higher energy costs and global uncertainty.

The recommendation comes as markets increasingly expect the BOJ to deliver another rate hike as early as April, driven by mounting inflationary pressure linked to rising oil prices and higher import costs exacerbated by a weak yen.

In a statement issued from Washington following its policy consultation with Japan, the IMF said economic growth is likely to moderate partly due to the conflict, but added that gradual wage gains should support private consumption. It assessed that risks to both growth and inflation remain broadly balanced, with inflation projected to converge to the BOJ’s 2% target by 2027.

The IMF’s executive board commended Japan’s economic resilience to external shocks and said the central bank was appropriately withdrawing monetary accommodation after years of ultra-loose policy. It added that as underlying inflation moves toward the target, further rate increases toward a neutral level should proceed in a flexible and well-communicated manner.

The BOJ ended its large-scale stimulus programme in 2024 and has since raised interest rates multiple times, including in December, signalling confidence that Japan is on track to sustainably achieve its inflation goal. Policymakers have indicated readiness to continue tightening if economic conditions and price trends remain aligned with projections.

Rising oil prices, while weighing on Japan’s import-dependent economy, are also seen by policymakers as contributing to inflationary momentum alongside steady wage growth and broader price increases.

Financial markets have responded to increasingly hawkish signals from the BOJ by pricing in roughly a 70% probability of a rate hike this month. At the same time, the yen’s depreciation toward the 160-per-dollar level has heightened speculation about potential currency intervention.

Finance Minister Satsuki Katayama warned against speculative movements in the currency market, stating that authorities stand ready to take all legally available measures, including unconventional steps, to stabilise the yen.