BOJ to tighten as IMF flags two 2025 hikes, one 2026

IMF expects BOJ: two hikes this year, one next year

According to the International Monetary Fund, the bank of Japan is expected to raise interest rates twice this year and once more next year, indicating a gradual normalization path. The projection implies continuing, data-dependent tightening rather than a rapid exit.

As reported by Reuters, the institution also urged Japan to keep raising rates and avoid loosening fiscal policy. That guidance frames monetary-fiscal coordination as important while inflation dynamics settle.

Why this matters: inflation durability, wage growth, neutral rate context

The central bank’s data-dependent stance centers on whether inflation is durable and broad-based, with wage growth anchoring price dynamics. Governor Kazuo Ueda has emphasized patience and underlying economic strength before further moves.

Analysts have framed the trajectory as cautious to safeguard growth while anchoring the 2% target. “A gradual pace of tightening is necessary to enable the BOJ to meet its inflation target without damaging growth,” said Pierre-Olivier Gourinchas, Chief Economist.

Staff estimates put Japan’s neutral interest rate in a 1%–2% range, with a midpoint near 1.5%, providing a benchmark for how far policy may need to normalize over time. That context helps separate cyclical inflation from structural rate settings.

A recent Article IV consultation judged that a gradual withdrawal of accommodation would be appropriate if the baseline materializes, underscoring flexibility and data dependence. The outlook remains conditional on wages, core measures, and external risks.

Near-term impact on yen, JGB yields, and Japan equities

A path of two hikes this year could, all else equal, support the yen if rate differentials narrow. It may also nudge Japanese government bond yields higher as policy rates reset.

Equities could face cross-currents: a firmer yen can weigh on exporters, while clearer inflation control may support domestically oriented shares. Outcomes would likely hinge on earnings resilience and wage momentum.

Market reactions should remain sensitive to communications and data surprises, particularly on wages and core-core inflation that shape expectations for timing and pace.

BOJ interest rate hikes 2025: triggers, risks, and scenarios

Base case versus faster or slower tightening paths

The base case aligns with two hikes in 2025 and one in 2026, contingent on sustained progress toward the 2% objective and continued wage gains. This path reflects cautious normalization.

A faster pace would likely require firmer, broad-based price persistence alongside stronger pay settlements. A slower path would reflect softer momentum or downside shocks to growth.

Potential accelerators or delays: wages, core-core inflation, tariffs

Potential accelerators include robust shunto outcomes, stickier core-core inflation, and resilient domestic demand. Potential delays include easing core measures, weaker wages, or tariff uncertainty that tilts risks to growth.

At the time of this writing, Bitcoin traded near $67,587 with very high 30-day volatility around 12%, a snapshot of broader risk sentiment not directly related to BOJ decisions.

FAQ about IMF forecast for BOJ rates

What indicators is the BOJ watching, like wage growth and core inflation, before deciding on further rate hikes?

Durability of inflation, broad-based core and core-core measures, and sustained wage growth. Governor Kazuo Ueda has emphasized underlying economic strength and patience.

What is the IMF’s estimate of Japan’s neutral interest rate and why does it matter?

Staff estimate a 1%–2% neutral rate, midpoint near 1.5%. It benchmarks how far policy may normalize without stimulating or restraining growth, framing gradualism.