Key Points:
- The IMF advised Japan to continue raising interest rates.
- The agency warned against a proposed cut to the consumption tax.
- Prime Minister Takaichi pledged to suspend the 8% tax on food.
- Japan’s inflation has remained above the 2% target for four years.
The International Monetary Fund (IMF) issued a stern warning to Japan on Wednesday, urging the country to keep raising interest rates and tighten its belt. The global financial agency specifically cautioned against cutting the national consumption tax. They argue that such a move would make Japan financially weaker and less able to handle future economic crises.
This advice comes right as the country’s newly elected Prime Minister, Sanae Takaichi, prepares to govern. Takaichi won a landslide victory on a platform that included a two-year suspension of the 8% consumption tax on food sales. Her dovish stance on economic policy has raised questions about whether she will pressure the Bank of Japan (BOJ) to stop hiking interest rates.
The IMF stressed that the central bank must remain independent. They believe the BOJ’s credibility is essential to keep inflation under control. “The BOJ is appropriately withdrawing monetary accommodation, and gradual hikes should continue,” the IMF stated in its recommendation.
Japan’s central bank has already shifted its policy significantly. After years of massive stimulus programs, the BOJ started raising interest rates in 2024. In December, they pushed the rate to 0.75%, a 30-year high. This was in response to inflation that has remained above the bank’s 2% target for nearly four years.
Higher borrowing costs could complicate Takaichi’s plans. Her proposed tax cuts and spending programs already spooked the bond markets late last year, as investors worried about Japan’s growing debt. The IMF echoed these concerns, noting that Japan’s interest payments are on track to double by 2031.
The IMF advised the government to avoid any further loosening of fiscal policy. They called for a clear plan to manage the country’s high debt levels. As the BOJ stops printing money and starts shrinking its balance sheet, the government must show it can keep the bond market stable on its own.
