Japan’s Prime Minister Sanae Takaichi, chief of the ruling Liberal Democratic Celebration (LDP), speaks throughout a press convention on the LDP headquarters in Tokyo, Japan, on February 9, 2026.
Franck Robicho | Anadolu | Getty Photos
The Worldwide Financial Fund urged Japan to maintain elevating rates of interest and keep away from loosening fiscal coverage additional, warning that trimming the consumption tax would erode its capability to reply to future financial shocks.
The advice got here as dovish Prime Minister Sanae Takaichi’s landslide election win heightens market consideration as to if she is going to push again in opposition to additional price hikes by the central financial institution. It additionally follows Takaichi’s pledge to droop by two years an 8% consumption tax on meals gross sales.
The IMF stated the Financial institution of Japan’s “continued independence and credibility” will assist hold inflation expectations properly anchored, warning the federal government in opposition to meddling an excessive amount of in financial coverage.
“The BOJ is appropriately withdrawing financial lodging, and gradual hikes ought to proceed to maneuver the coverage price towards impartial,” the IMF stated in its preliminary coverage suggestion to Japan launched on Wednesday.
“Because the baseline projection continues to materialize, withdrawal of coverage lodging ought to proceed in order that the coverage price reaches a impartial stance in 2027,” it stated.
The BOJ exited an enormous stimulus programme in 2024 and raised rates of interest a number of occasions together with in December final yr, when it pushed up its coverage price to a 30-year excessive of 0.75%.
With inflation exceeding its 2% goal for practically 4 years, the BOJ has signalled its readiness to maintain mountain climbing charges.
Greater borrowing prices might complicate Takaichi’s tax minimize and spending plans, which triggered a selloff in bonds and yen late final yr on concern over Japan’s worsening funds.
The IMF stated Japan ought to keep away from lowering the consumption tax as it could “erode fiscal area and add to fiscal dangers.”
Whereas limiting the tax minimize to important items and making certain it’s momentary would assist comprise fiscal prices, Japan wants fiscal restraint to assist hold bond markets secure, it stated.
“Close to-term fiscal coverage ought to chorus from additional loosening,” the IMF stated, calling for a reputable medium-term fiscal framework with a “clearly outlined fiscal anchor.”
“Excessive and protracted debt ranges, along with a deteriorating fiscal stability, go away Japan’s economic system uncovered to a spread of shocks,” the IMF stated, warning that rate of interest funds are projected to double from 2025 to 2031 as debt is rolled over at increased yields.
1 / 4 of Japan’s whole spending is funded by debt, of which roughly half is held by the BOJ after years of heavy cash printing to reflate the economic system.
Because the BOJ tapers its bond shopping for and reduces the dimensions of its stability sheet, Japan should intently monitor market liquidity and shifting demand throughout traders, the IMF stated.
If heightened volatility undermines liquidity, the BOJ needs to be ready to make “distinctive focused interventions,” reminiscent of emergency bond-buying operations, it stated.
On yen strikes, the IMF welcomed authorities’ “continued dedication to a versatile trade price regime,” including that exchange-rate flexibility ought to “assist soak up exterior shocks and help financial coverage’s deal with value stability.”
