Japan should start raising interest rates in a calibrated manner and limit fiscal measures to targeted support, a senior International Monetary Fund official said, noting the countrys solid domestic demand and a shift toward positive wage growth.
Krishna Srinivasan, director of the IMFs Asia Pacific Department, set out the advice at a news conference, highlighting the recent improvement in pay outcomes and the role of annual wage negotiations in delivering meaningful increases. Srinivasan said the IMFs counsel to the Bank of Japan is to remain data dependent and to begin gradually increasing policy rates over time.
The comments arrive ahead of the Bank of Japans policy meeting later this month, when the central banks board will assess economic headwinds - including inflationary pressure linked to the Middle East war - against domestic momentum in deciding whether to raise interest rates.
Srinivasan noted that overall growth in Japan has been resilient, supported by robust domestic demand. He added that inflation is expected to converge to the BOJs 2% objective by 2027, reinforcing the case for a measured approach to tightening.
On fiscal strategy, the IMF official urged that fiscal buffers be deployed wisely and that any support measures be directed to those most in need. Japan has implemented subsidies to ease the burden of higher gasoline and utility costs on households - measures that Srinivasan described in the context of limited fiscal space given the countrys already large debt stock.
The domestic policy debate includes voices favoring expansionary measures. Prime Minister Sanae Takaichi has advocated increased spending to stimulate growth and has previously expressed reservations about BOJ rate hikes. The IMFs recommendation underscores the tension between calls for fiscal expansion and the need to preserve fiscal buffers.
With a BOJ meeting imminent, the IMFs guidance centers on data-driven decision making for monetary policy, gradual rate normalization, and narrowly targeted fiscal relief to manage cost-of-living pressures while safeguarding long-term fiscal stability.