IMF urges Bank of Japan to move ‘very gradually’ with rate hikes

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By Leika Kihara

WASHINGTON (Reuters) -The Bank of Japan must keep monetary policy loose and move very gradually in raising interest rates as global trade uncertainty clouds the economic outlook, a senior International Monetary Fund official said on Wednesday.

Japan’s economy has performed better than expected so far this year on robust consumption and exports, with Tokyo’s trade deal with Washington easing some uncertainty, said Nada Choueiri, deputy director of the IMF’s Asia and Pacific Department.

But risks to growth are skewed to the downside on lingering uncertainty over the fate of U.S.-China trade talks, and the possibility of a reversal in loose global financial conditions, she said.

There is also uncertainty on whether domestic wages will continue to increase and underpin consumption enough to keep inflation sustainably around the BOJ’s 2% target, Choueiri said.

“Going forward, gradualism is very important because of the degree of uncertainty,” she told Reuters in an interview during the IMF and World Bank annual meetings in Washington.

“It’s important to be gradual, very gradual, and look at all the data that is coming through,” she said, when asked about dominant market views that the BOJ will likely raise rates again by next January.

POLITICAL UNCERTAINTY CLOUDS ECONOMIC OUTLOOK

The BOJ will hold its next monetary policy meeting on October 29-30, followed by meetings in December and January.

Japan’s central bank exited a decade-long, massive stimulus program last year and raised its key interest rate to 0.5% in January on the view that the country was on the cusp of durably hitting its 2% inflation target.

While BOJ Governor Kazuo Ueda has signaled the central bank’s readiness to keep raising rates, he has stressed the need to tread cautiously to scrutinize the economic impact of U.S. tariffs.

But sticky food inflation, blamed in part on rising import costs from a weak yen, has complicated the BOJ’s decision on how soon to raise rates. Two of its nine-member board unsuccessfully proposed a rate hike in September, in a sign of policymakers’ growing focus on broadening inflationary pressure.

Choueiri said risks to the price outlook were balanced, adding that the weak yen’s pass-through on inflation was limited.

“We have not seen worrisome signs of overheating in terms of consumption and underlying inflation,” Choueiri said. “I would disagree that they are behind the curve.”

Political uncertainty has added to the risks for the fragile Japanese economy. New ruling party leader Sanae Takaichi’s bid to become Japan’s first female prime minister was thrown into doubt last week when her ruling party’s junior coalition partner quit.

The ruling party also suffered a defeat in an upper house election in July amid public discontent over rising inflation. Ruling and opposition parties alike have proposed ramping up spending to cushion the blow to households.

Given its already huge public debt, Japan must come up with a fiscal consolidation plan and ensure any spending plans are temporary and targeted to low-income households, Choueiri said.

“Once food prices stabilize and there is no more inflation, you should start withdrawing the support,” she said.

“The kind of proposals made like VAT (value-added tax) cuts, or blanket subsidies that are not targeted would not serve Japan well at this juncture, because it would put a lot of burden on the deficit.”

(Reporting by Leika Kihara; Editing by Paul Simao)