The IMF says the Bank of Japan can look past inflation from the Middle East conflict, with limited broader price effects allowing for continued gradual rate hikes.
WASHINGTON: The Bank of Japan can see through inflationary pressures from the war in the Middle East as any second-round effects on broader prices will be limited, Rahul Anand, the International Monetary Fund’s mission chief for Japan, told Reuters on Wednesday.
Anand made his remarks as surging oil prices from the conflict add to mounting inflationary pressures, and keep alive market expectations of a near-term interest rate hike by the BOJ.
Investors are focusing on whether the BOJ will raise rates at its April 27-28 policy meeting, chances of which have receded as fading hopes for an end to the U.S.-Israeli war with Iran keep markets volatile and muddy the economic outlook, sources have told Reuters.
While rising fuel costs from the war will push up headline inflation, the BOJ can stick to its plan of gradual rate hikes, as such price pressures won’t de-anchor inflation expectations, Anand said in an interview on the sidelines of the IMF and World Bank spring meetings in Washington.
“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,” he said.
“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,” he said. “Unlike many other central banks, the BOJ has room to see through this shock.”
But Anand said the BOJ must be data-dependent and flexible in setting policy, as uncertainty over the intensity and duration of the war presents risks to the growth and inflation outlook.
YEN LEVEL SHOULD BE DETERMINED BY MARKETS
Anand said the IMF maintains its view that Japan’s inflation will converge to the central bank’s 2% target by the end of 2027. It expects the BOJ to hike its policy rate three more times, to 1.5% from the current 0.75%, by around the middle or end of next year.
The IMF expects Japan’s economy to grow 0.7% in 2026 and 0.6% in 2027, slowing from a 1.2% expansion in 2025 but roughly unchanged from its forecasts in October.
“Japan has been very resilient,” including to the shock from higher U.S. tariffs last year, Anand said, when asked whether the import-reliant economy could face recession due to the hit from higher energy costs.
Real wages will also turn positive and continue rising due to solid pay hikes offered by firms in annual wage negotiations, underpinning domestic demand, he said.
“We only expect a modest decline in growth and modest uptick in inflation under our baseline. However, uncertainty remains high.”
Aside from rising oil prices, a stubbornly weak yen has been a source of concern for policymakers by pushing up import costs and broader inflation.
Anand said Japan did not see a huge pass-through on inflation from a weak yen in 2025. The yen’s depreciation also helped absorb some of the hit from higher U.S. tariffs, he said.
“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 advantages and disadvantages of a weak yen on the economy.