The International Monetary Fund (IMF) said Japan could increase interest rates a little faster than it expected before. However, the rise will still be gradual.
Japan’s economy grew by 1.2% in 2025. But growth is likely to slow to 0.7% in 2026 and 0.6% in 2027, according to the IMF. These numbers are almost unchanged from earlier forecasts.
The IMF said government spending and steps to reduce fuel costs will help support the economy. This could balance the negative effects of weak global demand and tensions in the Middle East.
Inflation in Japan is expected to ease over time. Prices are likely to move closer to the Bank of Japan’s 2% target by the end of 2027 as food and energy prices become more stable.
The Bank of Japan is expected to keep raising interest rates step by step. The IMF believes the rate could reach around 1.5% in the long term, which is considered a normal level.
Japan ended its long period of economic stimulus in 2024. Since then, the central bank has raised rates several times. In December, it increased the short-term rate to 0.75%, the highest in about 30 years.
However, rising oil prices due to Middle East conflicts are creating challenges. Japan depends heavily on imported energy, so higher fuel costs are putting pressure on both inflation and economic growth.
Kazuo Ueda, the central bank governor, has said more rate increases are possible if the economy remains stable.
Investors are now watching closely to see if the Bank of Japan will raise rates again at its next meeting in late April. But global uncertainty is making the situation less clear.
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