The Bank of Japan might increase interest rates again this year, making it more expensive to borrow money. By the end of 2027, they expect borrowing costs to be in a “neutral” range, which is between 1% and 2% interest. This news comes from Nada Choueiri, a senior official from the International Monetary Fund (IMF).
She mentioned that Japan’s economy could grow by 1.1% this year. As wages go up, people will spend more, helping the country reach its goal of 2% inflation. Choueiri believes that if everything goes as planned, the Bank of Japan (BOJ) will keep gradually raising interest rates.
Last year, the BOJ started to end a long period of giving out cheap money. In January, they raised short-term interest rates from 0.25% to 0.5% because they thought Japan was close to achieving its inflation target. BOJ Governor Kazuo Ueda is determined to continue these rate hikes, aiming for a “neutral” level of interest rates, which they currently think is between 1% and 2.5%.
Choueiri said they support the BOJ’s approach, but it’s important that the increases are gradual. If done properly, this should help improve domestic spending. She believes rates will go above 0.5% by the end of this year, reaching neutral levels by 2027.
However, risks remain. Uncertainty in the world and problems with global trade could hurt Japan’s economy. The IMF suggests Japan should cut down on energy subsidies and shift money into areas that will help the economy grow better. They believe the government should make a clear plan to reduce its debt over the next few years.
Japan’s Prime Minister Shigeru Ishiba is facing pressure to spend more money and change tax rules, which could make Japan’s financial situation worse. With expected interest rate hikes, the cost of borrowing could go up, making it tougher for Japan to manage its significant debt.
For now, the chance of a sudden rise in bond yields is low because the BOJ’s rate increases will be slow. But Choueiri warns that the government must act quickly to start improving their finances. She believes it’s crucial to begin a plan for reducing the deficit now instead of waiting for a time when they might have to make sudden changes.
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