IMF says the BOJ can look through Iran war-driven inflation, with limited second-round effects, allowing gradual rate hikes to continue as inflation still converges to the 2% target by 2027.
Summary:
- The IMF said the Bank of Japan can “see through” inflation pressures from the Iran war, with limited second-round effects expected.
- IMF mission chief Rahul Anand expects headline inflation to rise temporarily, but without feeding strongly into wages or core prices.
- Inflation is still projected to converge to the BOJ’s 2% target by end-2027.
- The BOJ is expected to continue gradual rate hikes, reaching around 1.5% by mid-to-late 2027.
- Japan’s growth is seen slowing modestly to 0.7% in 2026 and 0.6% in 2027.
- The weak yen has not significantly boosted inflation and helped absorb external shocks such as tariffs.
The International Monetary Fund said the Bank of Japan is well positioned to look through inflation pressures stemming from the Iran war, arguing that the impact on underlying price dynamics is likely to remain limited and should not derail the central bank’s gradual tightening path.
Speaking to Reuters, IMF mission chief for Japan Rahul Anand said rising oil prices linked to the Middle East conflict will push up headline inflation in the near term, but are unlikely to generate strong second-round effects in wages or core inflation. As a result, the BOJ can afford to maintain its current policy trajectory without needing to react aggressively to what is expected to be a temporary shock.
Anand emphasised that Japan differs from many other economies in that inflation expectations remain relatively well anchored, allowing policymakers to “see through” energy-driven price spikes. Even if headline inflation rises, the BOJ can continue withdrawing monetary accommodation at a measured pace, broadly in line with its existing baseline.
The IMF continues to expect inflation to converge toward the BOJ’s 2% target by the end of 2027, with the central bank likely to deliver further rate increases, taking the policy rate from 0.75% to around 1.5% by mid-to-late next year.
On the growth side, Japan’s economy is projected to slow modestly, expanding by 0.7% in 2026 and 0.6% in 2027, down from 1.2% in 2025. However, the IMF sees resilience in domestic demand, supported by improving real wages following strong annual pay negotiations.
Anand also downplayed concerns about yen weakness, noting that currency depreciation has not significantly fed into inflation and has helped cushion the impact of external shocks, including higher tariffs. He reiterated that exchange rate levels should be determined by markets, reflecting Japan’s status as a free-floating economy.
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Supports the view that the BOJ will not overreact to energy-driven inflation, reinforcing expectations for a gradual tightening path. Yen sensitivity to oil remains, but policy divergence with other central banks may stay contained.
