IMF says BOJ has room to keep raising rates

The International Monetary Fund endorsed the Bank of Japan's path toward further interest rate increases on Thursday, with the fund's second-ranking official saying Japan's economic revival gives the central bank room to keep normalizing policy after nearly three decades of ultra-loose monetary settings.

IMF Sees "Significant Transformation"

Dan Katz, the IMF's First Deputy Managing Director, said the BOJ is exiting its prolonged low-rate regime and should continue tightening. "The Bank of Japan has started to move out of its very low interest rate regime that was in place for almost three decades and normalize policy," Katz told Bloomberg Television in an interview from Cape Town.investing

Katz described Japan as undergoing a "very significant long-term transformation," with structural reforms launched under former Prime Minister Shinzo Abe now beginning to bear fruit. With inflation still modestly above target, he said he expects "continued normalization" ahead.bloomberg+1

The remarks came days after the United States and Japan jointly intervened in the foreign exchange market for the first time in 15 years to support the yen. U.S. Treasury Secretary Scott Bessent warned traders on August 4 that Washington would take further action if needed, calling the yen substantially undervalued.investing

BOJ Minutes Reveal Hawkish Debate

The IMF's endorsement reinforces expectations of a September rate hike, following the release on Tuesday of minutes from the BOJ's June meeting. Those minutes showed policymakers debated mounting price risks even as they raised the policy rate to 1%, a 31-year high.reuters

Several board members warned that consumer inflation would likely accelerate in the latter half of fiscal year 2026 as firms plan price increases across a wide range of goods. Two members called for faster rate hikes to push the policy rate closer to neutral levels. Wholesale prices surged 7.1% in June, the fastest pace in more than three years, adding to the case for further tightening.reuters

Market Implications

Bank of America ↘ 0.40% now forecasts the yen appreciating roughly 6% by year-end, with USD/JPY declining from around 158 to 149, supported by the joint intervention and expectations of BOJ rate hikes in coming months. Analysts at the bank suggested that acting in September rather than October would allow the BOJ to demonstrate resolve in addressing upside inflation risks.news.futunn

At its July meeting, the BOJ kept rates steady but signaled that future discussions would focus on upside price risks, leaving the door open for a September move.reuters