IMF urges Bank of Japan to move 'very gradually' with rate hikes

Core Viewpoint - The Bank of Japan (BOJ) should maintain a loose monetary policy and proceed very gradually with interest rate increases due to global trade uncertainties affecting the economic outlook [1][2][3]. Economic Performance - Japan's economy has outperformed expectations this year, driven by strong consumption and exports, aided by a trade deal with the U.S. that has reduced some uncertainties [1]. - The BOJ raised its key interest rate to 0.5% in January, believing the country was close to achieving a sustainable 2% inflation target [4]. Risks to Growth - There are significant downside risks to growth stemming from ongoing uncertainties regarding U.S.-China trade negotiations and potential reversals in global financial conditions [2]. - Concerns exist about whether domestic wages will continue to rise sufficiently to support consumption and maintain inflation around the BOJ's target [2]. Monetary Policy Approach - A gradual approach to monetary policy is deemed crucial given the current uncertainties, with a focus on analyzing incoming data before making further rate adjustments [3]. - The BOJ's next monetary policy meeting is scheduled for October 29-30, with additional meetings planned for December and January [4]. Inflation and Economic Conditions - BOJ Governor Kazuo Ueda has indicated a cautious stance on rate hikes, particularly in light of the economic impact of U.S. tariffs and persistent food inflation driven by a weak yen [5]. - The risks to the price outlook are considered balanced, with limited pass-through effects of the weak yen on inflation [6]. Political Landscape - Political uncertainty is contributing to the fragile economic environment, highlighted by the recent challenges faced by ruling party leader Sanae Takaichi in her bid to become Japan's first female prime minister [6].