The International Monetary Fund said that the Bank of Japan may need to accelerate the pace of raising interest rates if inflation rises more than expected, at a time when Japanese authorities face increasing pressure to contain rising prices and clarify how to finance spending plans and reduce taxes, amid market fears of a worsening public debt.
The Fund's Asia and Pacific Department Director, Krishna Srinivasan, said that the Central Bank of Japan is moving in the right direction by normalizing monetary policy and gradually raising interest rates towards levels consistent with the stability of economic activity.
He added, in an interview with Reuters on the sidelines of the annual meetings of the Fund and the World Bank in Bangkok, that inflation exceeding expectations may require tightening monetary policy at a faster pace, to avoid inflation expectations slipping away, stressing that the bank’s decisions will remain linked to economic data.
These statements come ahead of the Bank of Japan's monetary policy meeting later in October, amid expectations that the bank will keep interest rates unchanged, with the possibility of signals paving the way for a hike in December.
The bank's governor, Kazuo Ueda, confirmed on Friday that the bank will focus on stabilizing core inflation near its target of 2 percent, stressing its intention to continue raising interest rates.
The Bank of Japan raised the interest rate to 1.25 percent in September, its highest level in 31 years, after a previous increase in June, in light of escalating inflationary pressures, including rising import costs due to the weak yen.
The yen moves under the influence of speculation
Regarding the exchange market, an analysis by the Fund showed that a large part of the yen’s movements since mid-2025 is not related to basic economic factors, such as interest yield differences, but rather coincides with the movements of speculative positions in futures contracts for the Japanese currency.
Srinivasan said that the Japanese authorities are fully committed to the free exchange rate system, explaining that they allowed the currency to move in the market as the first line of defense, given the depth of the Japanese exchange market.
Japan carried out a rare, coordinated intervention with the United States on July 31, after the yen approached its lowest levels in nearly 40 years, amid fears of the repercussions of its decline on the stability of financial markets.
The weakness of the Japanese currency increases inflationary pressures by raising the cost of raw materials and imported goods, which enhances the challenges facing monetary policy.
Sources of financing spending
On the public finance front, the Fund warned that the ambiguity of financing sources for new spending plans and consumption tax cuts may increase investor concerns about financial risks in Japan, which has accumulated high levels of debt after years of government spending.
Srinivasan said Japan needs to clarify how to finance these plans, in addition to developing a medium-term fiscal framework that sets the course for revenues and spending and boosts market confidence.
The proposed plans include reducing the consumption tax for two years, starting next April, which raises questions about its impact on public revenues at a time when borrowing costs are increasing globally.
However, the official pointed out that Japan has made progress in controlling its financial conditions since the “Covid-19” pandemic, compared to the rest of the G7 countries, supported in part by higher tax revenues.
Saudi Finance Minister Mohammed Al-Jadaan, Chairman of the International Monetary and Financial Committee, stressed that the continuation of wars, conflicts, and supply chain disruptions imposes significant humanitarian and economic costs on the world, and increases pressure on prices, especially in the poorest and most fragile countries, stressing the importance of enhancing economic and financial stability, intensifying international cooperation, and ending conflicts to achieve sustainable growth and long-term stability.
The statement of the presidency of the fifty-fourth meeting of the committee, issued in Bangkok on Saturday, explained that the global economy was able to overcome the series of recent shocks with better performance than expected, but the protective margins have eroded, which makes its continued ability to withstand not guaranteed. The statement warned that escalating conflicts and trade tensions, rising public debt, and refinancing costs may increase economic and financial vulnerabilities, at a time when economies are witnessing accelerated structural transformations due to technological development, demographic changes, and climate risks.
The committee stressed the need to address weaknesses in public finances, enhance debt sustainability, protect the most vulnerable groups, and make investments that support productivity and growth. It also stressed the importance of the independence of central banks, the security of energy flows, freedom of navigation, and developing international cooperation in confronting economic and financial challenges.
Finally, the Committee praised the leadership undertaken by Saudi Arabia of the International Monetary and Financial Affairs Committee, and welcomed the extension of Al-Jadaan as Chairman of the Committee for a period of one year.
