The IMF's World Economic Outlook indicates that Japan's growth is expected to slow to 0.7% in 2026, while the Bank of Japan is seen as likely to raise interest rates gradually toward the neutral rate.
The IMF forecast in its World Economic Outlook that Japan's growth rate would slow to 0.7% in 2026. While fiscal support will partially mitigate the impact of higher energy prices, growth is expected to slow from 1.2% the previous year, before stabilizing at 0.7% in 2027 as the impact of the energy shock eases and monetary policy gradually normalizes.
The Bank of Japan raised its policy rate to 1.25% in September, the highest level in 31 years. It has indicated that it intends to continue tightening monetary policy to contain the risk of inflation exceeding its 2% target, and the IMF's view effectively endorses the BOJ's policy management.
Japan has a high dependence on imported fuel and raw materials and is structurally vulnerable to energy shocks and currency depreciation. Without naming any specific country, the IMF noted that it is possible to look through the impact on inflation and short-term volatility only when a shock is temporary.
The IMF also addressed developments in the foreign exchange market, indicating that intervention, including coordinated intervention by Japan and the United States, could be possible if yen depreciation accelerates. While emphasizing orderly adjustment and the preservation of financial stability and accepting flexibility in exchange-rate movements, it said intervention could be an option in the event of disorderly market conditions.