IMF revises Japan's economic forecast higher, sees gradual BOJ rate hikes

The International Monetary Fund revised higher on Tuesday its 2025 economic growth forecast for Japan and projected the nation's central bank to gradually raise interest rates over the medium term to around 1.5 percent from the current 0.5 percent.

In its World Economic Outlook report, the IMF projected Japan's economy to expand 1.1 percent in 2025, up from 0.1 percent last year and higher than the 0.7 percent growth estimated in July. It expects economic growth to slow to 0.6 percent in 2026, up 0.1 percentage point from the projection made in July.

An expected pickup in real wage growth will support private consumption, offsetting headwinds from uncertainty over U.S. trade policy and soft external demand, the IMF said.

The BOJ is likely to raise interest rates gradually over the medium term toward 1.5 percent, a level considered neutral to the economy, and "consistent with keeping inflation and inflation expectations anchored" at its 2 percent target, it said.

Japan's economy expanded an annualised 2.2 percent in the second quarter after a 0.3 percent gain in the first quarter on solid capital expenditure and a boost to exports from automakers front-loading shipments to beat U.S. tariffs.

"However, new export orders fell in July, for the first time since December, and export values dropped, led by sectors most affected by tariffs," the IMF said, suggesting the fallout from higher U.S. levies could intensify in coming months.

Japan clinched a trade deal with the U.S. in July, under which Washington cut tariffs on automobile imports and spared Tokyo from punishing new levies on other goods in exchange for a US$550 billion package of U.S.-bound investments and loans.

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5 percent in January on the view Japan was on the cusp of sustainably achieving its 2 percent inflation target. It has kept rates steady since then.

With consumer inflation remaining above 2 percent for well over three years, Governor Kazuo Ueda has stressed the bank's readiness to continue raising rates if the economy sustains a moderate recovery as it projects.

REUTERS