Market Analysis

Japan Set to Meet BOJ’s Inflation Goal, Says IMF

Amos Simanungkalit · 03 Apr71.5K Views

Image Credit: Reuters

The International Monetary Fund (IMF) stated on Wednesday that Japan is showing signs of being on track to sustainably meet the Bank of Japan’s 2% inflation target, driven by strong consumption and capital expenditure. The IMF highlighted that after decades of near-zero inflation, Japan’s economy appears to be finding a new equilibrium, with inflation expected to stabilize at the 2% target and growth at 0.5%.

The IMF acknowledged that risks to growth remain tilted to the downside, with concerns about a global economic slowdown and weakened domestic consumption posing potential challenges. However, risks to inflation are more balanced, with rising food and energy prices acting as upside risks, though they are expected to moderate over time.

In its statement following the annual consultations with Japan, the IMF did not address the potential impact of the recent U.S. tariffs, including the 24% levy on Japanese imports announced by President Trump. Japan's inflation has remained above the Bank of Japan’s target, standing at 3.7% in February, largely due to high food costs.

The IMF also recommended that the Bank of Japan gradually reduce its monetary stimulus if the economy follows the growth projections, and urged the central bank to stay flexible, data-dependent, and transparent in its communication, particularly regarding interest rate adjustments.

For 2025, the IMF forecasts Japan’s economy will grow by 1.2%, following a modest 0.1% increase in 2024, with robust corporate profits and rising wages expected to support private spending. Inflation is projected to ease slightly to 2.4% in 2025 from 2.7% in the previous year.

In January, the Bank of Japan raised interest rates to 0.5%, ending a long period of stimulus, as officials believe Japan is close to achieving its inflation goal. Governor Kazuo Ueda has indicated that further rate hikes may occur if rising wages continue to drive consumption and allow businesses to increase prices.