Japan's Central Bank Expected to Raise Interest Rates Further, IMF Official Says
Tokyo, Japan - The Bank of Japan (BOJ) is likely to raise interest rates again this year, with borrowing costs projected to reach neutral levels by 2027, according to Nada Choueiri, Deputy Director of the International Monetary Fund's (IMF) Asia-Pacific Department.
Choueiri estimated Japan's neutral rate to be between 1% and 2%, with a mid-point of 1.5%. This bandwidth aligns with the BOJ's own assessment, which ranges from 1% to 2.5% on a nominal basis.
The IMF forecasts Japan's economy to expand by 1.1% in 2023, driven by increased consumption supported by rising wages. Choueiri expressed confidence in the BOJ's gradual approach to policy rate increases, which aim to achieve sustained inflation at 2%.
After ending its massive monetary stimulus last year, the BOJ raised short-term interest rates to 0.5% in January. Governor Kazuo Ueda has indicated his commitment to continuing rate hikes.
Choueiri commended the BOJ's monetary policy strategy and emphasized the importance of gradual and flexible rate increases to encourage domestic demand. She anticipated interest rate adjustments beyond 0.5% by the end of the year, with a target of reaching neutral levels by 2027.
However, risks to Japan's economy remain, with increased uncertainty and geopolitical fragmentation potentially impacting global demand and affecting companies with global supply chains.
On the fiscal front, the IMF urged Japan to eliminate energy subsidies and prioritize spending that boosts long-term growth. Choueiri suggested focusing on areas with high multipliers, such as enhancing the efficiency of private investment.
Lastly, she highlighted the need for a comprehensive fiscal consolidation plan to reduce Japan's debt-to-GDP ratio. Choueiri emphasized the importance of seizing the current window of opportunity to implement fiscal reforms.