By Leika Kihara
BANGKOK, Oct 17 (Reuters) - The Bank of Japan is "doing the right thing" by normalising monetary policy and may need to raise interest rates faster if inflation rises more than expected, a senior International Monetary Fund official told Reuters.
Japan must also clarify how it plans to fund its big spending plans and lay out a medium-term fiscal framework to ease market concerns about fiscal risks, said Krishna Srinivasan, director of the IMF's Asia and Pacific Department.
"I would say
that they are doing the right thing at this point," Srinivasan said on the BOJ's efforts to lift its policy rate towards levels deemed neutral to the economy.
"If inflation rises faster than expected, you have to start tightening faster because you don't want inflation expectations to get un-anchored. It's data dependent," he said in an interview on Friday.
The remarks came ahead of the BOJ's key policy meeting later this month, when it could keep rates steady but drop hawkish hints that would reinforce dominant market expectations of a December hike.
Inflationary pressures from the Middle East conflict and brisk AI-demand were among key themes discussed by policymakers gathering for this week's annual IMF meetings in Bangkok.
BOJ Governor Kazuo Ueda, who attended the IMF meetings, said on Friday the central bank will focus on anchoring underlying inflation around its 2% target and won't tolerate any overshoot, stressing anew its resolve to continue raising interest rates.
For Japan, a weak yen adds to factors pushing up inflation by boosting the cost of raw material imports.
Such mounting price pressures prodded the BOJ to raise rates to a 31-year high of 1.25% in September, following a hike in June. Many analysts expect another rate increase by year-end.
Japan also conducted a rare, coordinated intervention with the US on July 31 to prevent the currency's slide to near 40-year lows from destabilising financial markets.
In staff analysis included in its report on Asia's economy, the IMF said a big portion of yen moves since mid-2025 had little to do with fundamental factors such as yield differentials, and instead co-moved with speculative positions in yen futures.
"Japan has a deep foreign exchange market, so as a first line of defense, they have allowed the exchange rate to move," Srinivasan said.
"Bottom line, I would say that the Japanese authorities are fully committed to a freely floating exchange rate. I've had many discussions with them. So I don't doubt that at all," he said when asked if the recent yen intervention was justified.
FISCAL FRAMEWORK NEEDED
Rising global bond yields have also drawn attention at this week's IMF meetings as debt in advanced economies, including Japan, expanded after years of heavy spending.
Markets worry that Japan may add to its already huge debt pile with the administration's big spending plans and a two-year cut to the consumption tax from April next year.
Srinivasan said Japan has in fact seen fiscal consolidation proceed more than any other G7 country since the pandemic due in part to rising tax revenues.
"Markets are concerned about the fiscal risks because of the uncertainty" on how Japan would pay for the fresh spending and tax-cut plans, he said. "Japan also would benefit from having a medium-term fiscal framework."
(Reporting by Leika Kihara; Editing by Sam Holmes)
