By Leika Kihara and Howard Schneider

Bank of Japan’s Interest Rate Policy

JACKSON HOLE, Wyoming (Reuters) – The Bank of Japan (BOJ) can gradually raise interest rates due to increasing inflation expectations, according to the International Monetary Fund (IMF).

Key Insights from IMF Chief Economist

IMF chief economist Pierre-Olivier Gourinchas stated that the pace of future rate increases will depend on data regarding inflation, wage growth, and inflation expectations. Japan’s inflation currently exceeds 2%, with expectations hovering around or slightly above this target.

Shift in Monetary Policy

This development marks a significant shift in Japan’s long-standing ultra-loose monetary policy, which is welcomed by the IMF. Gourinchas emphasized that the normalization of monetary policy is necessary and suggests an ongoing gradual increase in policy rates.

Recent BOJ Actions

In recent months, the BOJ ended negative interest rates and raised its short-term policy rate to 0.25%, moving away from a decade-long stimulus program. Governor Kazuo Ueda has indicated that further interest rate increases are possible if inflation approaches the 2% target sustainably.

Economic Growth and Market Reactions

While economic growth may slow in 2024, the BOJ’s focus remains on stabilizing inflation expectations rather than mere economic activity. Gourinchas contrasted the BOJ’s approach with that of other central banks, which typically aim to lower inflation expectations.

Despite recent market turbulence tied to expectations of rising Japanese interest rates and specific U.S. economic data, Ueda reassured that the BOJ is prepared to raise rates while monitoring market stability carefully.

Gourinchas mentioned recent volatility is influenced by a mix of factors, and while he believes the market has overreacted, there could still be further episodes of instability as the BOJ’s policy diverges from that of other central banks seeking to ease.