(Bloomberg) -- The International Monetary Fund is gaining confidence over the sustainability of Japan’s inflation, and expects the Bank of Japan to stay on a gradual path of raising interest rates in coming years, according to its mission chief for the nation.
“We have seen indicators of consumption starting to increase, and we have seen employees’ scheduled earnings starting to increase, and this is an indication of a positive price-wage cycle working in the economy,” Nada Choueiri, the Japan mission chief, said Tuesday in an interview on the sidelines of the IMF and World Bank annual meetings in Washington. “This is why we are more confident.”
Choueiri spoke shortly after the IMF revised its projections to incorporate the BOJ’s July rate hike, which came faster than it expected. The global lender estimates a nominal neutral rate — the setting which neither stokes nor restrains inflation — at about 1.5%, higher than private economists’ estimate of 1%. The fund sees that level getting reached around the end of 2026. It also urged the bank to keep a cautious approach.
“Proceeding gradually and with caution is needed because of risks,” Choueiri said. “We have risks on both sides, upside and downside, and we have a high uncertainty. Not just from internal, domestic economic situation but also from the global economy.”
The BOJ is widely expected to keep its benchmark rate at 0.25% at the end of the next policy meeting, on Oct. 31 — just ahead of the US presidential election and the next Federal Reserve meeting. Prime Minister Shigeru Ishiba is also holding his first national election Sunday, adding to uncertainties, with local media reporting a chance of the biggest loss for the ruling Liberal Democratic Party since 2009.
In an attempt to raise the odds of winning, Ishiba has indicated his administration will compile a sizable extra budget after the election, to help those suffering from inflation and boost the broader economy. The IMF has said that extra budgets shouldn’t be compiled as a regular matter of course.
“The supplementary budget function is important to just keep as a tool to respond to shocks,” Choueiri said. “Spending needs to be focused on growth-enhancing areas, and it has to be well resourced within the overall budget envelope, so that medium-term debt sustainability is achieved.”
Amid high economic uncertainty, a key question among BOJ watchers is whether Governor Kazuo Ueda’s board will be able to proceed with a third rate hike this year, in December, and how the central bank will communicate its policy path.
Many economists concluded that the central bank helped to trigger global market turmoil in early August with its rate hike and forward guidance warning of further rate increases to come.
Choueiri has a different take on the BOJ’s historic ending of its ultra-easy monetary policy.
“This was a very big year for Japan,” Choueiri said. “The BOJ can give a lesson in communication to markets by the success that it had from exit. I think it’s important to keep that in mind — that the BOJ has done an excellent job at exiting YCC, QQE and at initiating QT, and what we would advise them is to continue to carefully communicate with the markets.”
The abbreviations themselves speak to the complexity of the BOJ’s policies over many years. YCC is yield-curve control, initiated in 2016. QQE was “quantitative and qualitative easing,” launched back in 2013. And QT is quantitative tightening, or a shrinking of the balance sheet, which began this year.
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