IMF Says BOJ Can Maintain Gradual Hikes Despite War
The IMF says the Bank of Japan can manage inflation from the Middle East conflict. Second-round price effects should remain limited as rate hikes continue.
The International Monetary Fund (IMF) has indicated that the BANK OF JAPAN/THE is well-positioned to manage inflationary pressures resulting from the conflict between Israel and Iran. Rahul Anand, the IMF mission chief for Japan, noted that while rising energy costs are pushing up headline inflation, the second-round effects on broader prices are expected to be limited.
Anand suggested that the central bank can maintain its plan for gradual interest rate hikes, as current price pressures are unlikely to unanchor inflation expectations. He emphasized that the domestic economy is less likely to see high prices feed into core inflation or wages compared to other nations.
Higher prices are less likely to feed into core inflation or wages, so we think that the second-round impact will be more moderate compared to other countries.
Market attention is currently fixed on the upcoming policy meeting on April 27-28. Although geopolitical tensions involving the United States have introduced volatility and complicated the economic outlook, the IMF believes the central bank has the flexibility to look past temporary spikes in headline figures.
Even if there is a temporary spike in headline inflation, the BOJ can see through that and resume the withdrawal of accommodation at the same pace as if the baseline pans out.
The IMF maintains its projection that inflation will converge to the 2% target by the end of 2027. The organization projects that the central bank will increase its policy rate three more times, reaching 1.5% by the middle or end of next year. Addressing the recent weakness of the yen, Anand emphasized that the exchange rate should be market-determined, adding that the currency's depreciation has helped absorb some pressure from foreign tariffs.
There is no level of exchange rate that anybody can say is right. It has to be determined by markets, because its an open economy with a free-floating exchange (rate).
