18.02.202604:35:22UTC+00IMF Urges Japan to Hike Rates, Avoid Tax Cuts

The International Monetary Fund on Wednesday urged Japan to continue raising interest rates and to avoid loosening fiscal policy, warning that cutting the consumption tax would “erode fiscal space and add to fiscal risks.” The recommendation follows Prime Minister Sanae Takaichi’s landslide election victory and her pledge to suspend the 8% tax on food for two years, a move that has sparked concerns about potential political pressure on monetary policy.

The IMF also underscored the importance of the Bank of Japan’s “continued independence and credibility,” noting that the central bank is “appropriately withdrawing monetary accommodation” and that gradual rate hikes should bring interest rates to a neutral level by 2027. The Bank of Japan ended its long-running stimulus program in 2024 and raised its policy rate to 0.75% in December, the highest level in three decades.

With inflation running above 2% for nearly four years, the IMF anticipates two additional rate increases this year and a further hike in 2027. It also welcomed Japan’s adherence to a flexible exchange rate regime, arguing that it will help the economy absorb external shocks and support price stability.