Washington, April 15 - The Bank of Japan has the capacity to withstand upward price pressures emerging from the war in the Middle East, the International Monetary Fund's mission chief for Japan said on Wednesday, arguing that any broader, second-round inflation effects should be modest.
Rahul Anand made the comments on the sidelines of the IMF and World Bank spring meetings in Washington, where rising oil prices tied to the conflict have amplified inflationary forces and kept markets attentive to the possibility of a near-term BOJ rate move.
Markets have been watching closely ahead of the BOJ's April 27-28 policy meeting. But Anand said the likelihood of a near-term hike has lessened recently as fading hopes for an end to the U.S.-Israeli war with Iran have prolonged market turbulence and clouded the economic outlook, according to sources cited in the reporting.
While acknowledging that higher fuel costs from the conflict will lift headline inflation, Anand stressed the central bank can continue with a gradual path of tightening because those price shocks are unlikely to unsettle inflation expectations.
"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," Anand said.
He added that, even if headline inflation spikes temporarily, the BOJ can "see through" that increase and proceed with withdrawing policy accommodation at the same pace assumed under the baseline outlook.
"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," Anand said. "Unlike many other central banks, the BOJ has room to see through this shock."
At the same time, Anand emphasized that the BOJ must remain data-dependent and ready to adapt policy as warranted, because uncertainty about how intense and prolonged the conflict will be represents risks to both growth and inflation forecasts.
The IMF continues to project that Japan's inflation will return to the Bank of Japan's 2% target by the end of 2027. The fund also expects the BOJ to lift its policy rate three more times - taking it from the current 0.75% to about 1.5% - by around the middle or the end of next year.
Beyond higher oil prices, a persistently weak yen has been a concern for Japanese policymakers because it raises import costs and weighs on broader inflation measures. Anand said the IMF did not see a large pass-through to inflation from the weaker yen in 2025, and he noted that the currency's depreciation helped offset some of the impact from higher U.S. tariffs.
"There is no level of exchange rate that anybody can say is right. It has to be determined by markets, because it’s an open economy with a free-floating exchange (rate)," Anand said when asked about the trade-offs of a weaker yen.
He concluded by reiterating the importance of monitoring incoming data closely and maintaining flexibility in policy decisions as the geopolitical situation evolves.
Summary
The IMF's Japan mission chief says the BOJ can look through the inflationary shock from the Middle East conflict as second-round effects are likely to be limited. The IMF projects inflation will return to 2% by end-2027 and anticipates three more rate hikes to 1.5% by mid- to late-2026, while urging the BOJ to remain data-dependent amid uncertainty.