On Friday, the IMF’s first deputy managing director, Gita Gopinath, recommended the Bank of Japan (BOJ) stop its yield curve control and asset purchases and raise short-term interest rates gradually instead.
Japan’s economy is rebounding, with domestic demand driving inflation as labour shortages intensify and the output gap closes. Current inflation, above the 2% target, spans products and services, signalling upward inflation risks. Core inflation, excluding food and energy, will likely stay above 2% until the second half of 2025 due to closed output gaps and rising wages.
The IMF suggests Japan tighten fiscal policy and wind down unconventional monetary policy for financial stability. The BOJ has hinted at ending negative rates and asset purchases, with market players expecting changes, possibly in April.
According to the IMF, to avoid market disruptions, the BOJ should reinvest in maturing government bonds. The IMF criticises energy subsidies and broad income tax cuts, considering them unnecessary given Japan’s recovery and high debt-to-GDP ratio. Instead, targeted transfers should replace energy subsidies to aid vulnerable households and support decarbonisation efforts. In summary, the IMF calls for cautious policy adjustments, emphasising communication and targeted measures to sustain Japan’s economic recovery.
