The IMF urged Japan to continue gradual rate hikes toward neutral by 2027 and warned against cutting the consumption tax, highlighting fiscal risks as Takaichi’s government pushes ahead with tax relief plans.
Summary:
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International Monetary Fund urges Japan to keep raising rates gradually to neutral by 2027.
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Warns against cutting the consumption tax, saying it would erode fiscal space and raise debt risks.
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Calls for near-term fiscal restraint and a credible medium-term anchor.
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Says Bank of Japan should intervene only if bond market liquidity deteriorates.
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Political tension: PM Sanae Takaichi and allies continue backing a sales tax pause despite IMF caution.
The International Monetary Fund has delivered a pointed message to Japan: continue tightening monetary policy, avoid fresh fiscal loosening, and think carefully before tampering with the consumption tax.
In its latest policy assessment, the IMF said the Bank of Japan is “appropriately withdrawing monetary accommodation” and should continue raising interest rates gradually so the policy rate reaches a neutral setting by 2027. With inflation running above the 2% target for nearly four years and the policy rate already lifted to 0.75%, the highest in three decades, the Fund argues that steady normalisation remains justified as long as the baseline outlook holds.
The sharper warning, however, was directed at fiscal policy. The IMF cautioned that reducing Japan’s consumption tax would “erode fiscal space and add to fiscal risks,” leaving the country more exposed to future shocks. It urged near-term fiscal restraint and the establishment of a clearly defined medium-term anchor to stabilise public finances.
That advice appears unlikely to shift the domestic political calculus. Prime Minister Sanae Takaichi and her allies have continued to advocate suspending the 8% food sales tax for two years following her election victory, framing the move as necessary support for households. Markets have already shown sensitivity to the prospect of looser fiscal settings, with bond yields and the yen reacting sharply late last year amid deficit concerns.
The IMF also addressed financial stability. As the BOJ reduces bond purchases and shrinks its balance sheet, it should monitor market liquidity closely. If volatility undermines functioning, the central bank should stand ready to deploy targeted emergency bond-buying operations. At the same time, the Fund welcomed Japan’s commitment to a flexible exchange rate regime, arguing that currency flexibility helps absorb external shocks and preserves monetary policy credibility.
For investors, the tension between IMF orthodoxy and Tokyo’s fiscal ambitions remains a central risk theme for 2026.
Japan PM Takaichi will probably show the IMF a different finger on their sales tax recommendation.
This article was written by Eamonn Sheridan at investinglive.com.
