IMF Advises BOJ Flexibility Amid 0.5% Growth Cut Due to Tariffs

The International Monetary Fund (IMF) has advised the Bank of Japan (BOJ) to remain flexible in its interest rate decisions, given the economic pressures and uncertainties stemming from U.S. tariffs. The IMF's Japan mission chief, Nada Choueiri, stressed the importance of data-driven decision-making rather than adhering to pre-set plans. This guidance follows the IMF's revision of Japan's economic growth forecast, which was lowered by 0.5% due to the impact of tariffs.

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Choueiri's remarks came after the IMF released its latest World Economic Outlook report, the first since U.S. President Donald Trump intensified global tariff measures. The report not only lowered global economic growth projections but also reduced Japan's 2025 economic growth forecast by 0.5 percentage points to 0.6%.

Like most other countries, Japan was granted a 90-day grace period for Trump's "reciprocal tariffs." Originally, the tariff rate for this Asian ally was set at 24%, but Japan currently faces a 10% base tariff and an additional 25% tariff on automobiles, steel, and aluminum products.

Choueiri noted that approximately 0.28 percentage points of the 0.5 percentage point reduction in Japan's economic growth forecast is directly attributable to tariffs, with the remainder due to indirect impacts and increased uncertainty. Nearly half of the direct impact comes from tariffs on the automotive and automotive parts sectors, which account for about 40% of Japan's exports to the U.S.

"We found that the damage from tariffs on automobiles and automotive parts is the most significant, and the uncertainty surrounding trade policy also has a highly negative impact," Choueiri stated.

Choueiri expects the BOJ to continue raising interest rates, but at a slower pace than previously anticipated. The IMF's latest outlook report reiterates the view that the BOJ will gradually raise its benchmark interest rate to around 1.5% in the medium term.

Choueiri's call for caution aligns with recent statements from BOJ officials. BOJ Governor Haruhiko Kuroda stated last week that the central bank would closely monitor economic conditions and assess whether the economic outlook could be achieved. The BOJ is set to meet next week to decide on monetary policy, with most economists expecting the benchmark interest rate to remain at 0.5%.

Japan's government bond yields have been rising, with the 20-year bond yield reaching its highest level since 2004 this month. In a country burdened with high public debt, rising yields have exacerbated concerns about borrowing costs. The IMF currently projects that Japan's debt-to-GDP ratio will reach 235% this year.

Choueiri pointed out that Japan will face significant pressures in the future, including an aging population, healthcare for the elderly, and climate impacts. "For us, Japan needs to quickly control its fiscal balance and embark on fiscal consolidation," she said.