TOKYO — The International Monetary Fund (IMF) has indicated that Japan is showing signs of sustainably achieving the Bank of Japan’s (BOJ) 2% inflation target, with strong consumption and capital expenditure expected to support the economy.
The IMF’s assessment, following its annual consultations with Japan, highlighted that Japan’s economy is poised to reach a new equilibrium with inflation sustained at the BOJ’s target, along with growth at a potential rate of 0.5%. While the IMF acknowledged downside risks to growth, including the possibility of a global economic slowdown and weakening domestic consumption, it noted that risks to inflation are broadly balanced.
Japan’s inflation stood at 3.7% in February, exceeding the BOJ’s target for nearly three years. High food costs have been a significant factor affecting households. However, the IMF anticipates that rising food and energy prices, which have contributed to inflation, are likely to moderate, allowing inflation to converge toward the BOJ’s target.
The IMF also recommended that the BOJ gradually scale back its monetary support if the economy progresses as anticipated. It emphasized the importance of the BOJ remaining flexible and data-dependent in its approach, especially in light of the uncertainty surrounding the level of Japan’s “neutral” interest rate, which neither stimulates nor suppresses economic growth.
Looking ahead, the IMF forecasts Japan’s economy to grow by 1.2% in 2025, following a slight increase of 0.1% in 2024. This growth is expected to be driven by strong corporate profits and the prospect of higher wages, which should support private spending. Headline inflation is expected to moderate to 2.4% in 2025, down from 2.7% in the previous year.
In response to these economic developments, the BOJ ended its decade-long stimulus program last year and raised interest rates to 0.5% in January. Governor Kazuo Ueda has stated that the BOJ will continue to increase borrowing costs if wage growth supports consumption and enables businesses to raise prices.
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