The head of the International Monetary Fund (IMF) delegation to Japan has expressed increasing confidence in the sustainability of Japan's inflation and anticipates that the Bank of Japan will continue to gradually raise interest rates over the next few years.
Nada Choueiri, the head of the Japanese delegation, said in an interview on the sidelines of the IMF and World Bank annual meetings in Washington on Tuesday: "We have seen consumption indicators starting to increase, and we have also seen planned income for employees starting to increase, which is a sign that the virtuous cycle of prices and wages is working in the economy. This is why we are more confident."
Choueiri's remarks came shortly after the IMF revised its forecasts to incorporate the Bank of Japan's interest rate hike in July, which was earlier than previously expected. The IMF estimates that the nominal neutral interest rate (the setting that neither stimulates nor restrains inflation) is about 1.5%, higher than the 1% expected by private economists. The institution expects this level to be reached around the end of 2026. It also urged the bank to maintain a cautious approach.
"Due to risks, it is necessary to proceed step by step and act cautiously," Choueiri said, "We have risks in both directions, there are upside risks, there are downside risks, and we have a high degree of uncertainty. Not only in the domestic economic situation but also in the global economic situation."
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Currently, it is widely expected that the Bank of Japan will keep the benchmark interest rate at 0.25% at the end of its next policy meeting on October 31, which will take place before the next meeting of the Federal Reserve.
In order to increase the chances of winning, Shigeru Ishiba stated that his government will compile a substantial additional budget after the election to help those suffering from inflation and to promote broader economic development. However, the IMF said that the compilation of additional budgets should not be made a norm.
Choueiri said: "The supplementary budget function is very important, but it can only be used as a tool to deal with shocks. Spending needs to be focused on areas that promote growth, and it must be adequately resourced within the overall budget to achieve medium-term debt sustainability."
A key question for Bank of Japan observers in the face of high economic uncertainty is whether the board led by Governor Haruhiko Kuroda will be able to carry out a third interest rate hike in December this year and how the central bank will communicate its policy path.
Many economists have concluded that the Bank of Japan's rate hike and its forward guidance warning of further rate hikes triggered turmoil in the global market in early August.
Choueiri has a different view on the Bank of Japan's historic ending of its ultra-loose monetary policy.""This year is a very important year for Japan," said Choueiri, "The Bank of Japan can learn lessons from the successful exit in communicating with the market. I think it's important to remember this — the Bank of Japan has done a good job in exiting Yield Curve Control (YCC), Quantitative and Qualitative Monetary Easing (QQE), and initiating Quantitative Tightening (QT), and we advise them to continue to communicate seriously with the market."
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