IMF backs BOJ's line – with reservations

The International Monetary Fund (IMF) has concluded its annual Article IV consultation with Japan, and the message is clear: Bank of Japan "is withdrawing monetary policy accommodation in an appropriate manner," according to the IMF's board. At the same time, a clear warning comes in the margin — if underlying inflation moves toward the target faster than expected, the central bank should be prepared to raise rates more frequently than the current gradual pace suggests, Investing.com writes (investing.com).

IMF staff recommend a "flexible, well-communicated and data-driven" approach going forward, citing significant uncertainty around wage pass-through to prices, external shocks, and the level of the neutral rate itself.

How high does the rate actually need to go?

A key point in the IMF's report is the estimate for Japan's nominal neutral rate — the level at which monetary policy neither stimulates nor restrains the economy. By combining several models (Dynamic Nelson-Siegel, Holston-Laubach-Williams and market consensus), IMF staff arrive at a range between 1.1 and 2.2 percent.

Since Japan's real interest rate remains deeply in negative territory relative to underlying price growth, the IMF believes monetary policy will remain expansionary until the policy rate approaches this corridor.

1.1–2.2 %
IMF's estimate of the neutral rate
2027
Target year for neutral monetary policy
5 %
Wage growth in this year's shunto negotiations

Inflation and wage growth keep the pressure up

After more than three and a half years of inflation above the 2 percent target, price growth fell to around 1.3–1.5 percent in early 2026, according to IMF figures. However, the Fund expects a renewed increase, with a gradual and lasting return to 2 percent during 2027.

The annual shunto wage negotiations have produced base wage increases of more than 5 percent, which supports expectations of positive real wage growth and keeps underlying price pressure elevated. The IMF describes the risk picture for inflation as "roughly balanced" — commodity prices and wage pass-through could push it up, while weaker global demand and vulnerable household finances could pull it down.

At the same time, the IMF expects Japan's GDP growth to slow from 1.2 percent in 2025 to 0.8 percent in 2026, driven down by weaker export demand, but partly offset by solid private consumption and investment.

The yen carry trade and global ripple effects

A rate hike in Japan could trigger global deleveraging – and the crypto market is often first in line.

For years, Japan has served as the world's cheapest source of financing. Investors have borrowed yen at low rates to buy high-yield bonds, tech stocks, and increasingly spot and leveraged crypto positions. The IMF's confirmation of a multi-year normalization cycle toward a terminal rate of around 1.5–2 percent by 2027 gradually closes the structural rate gap against Western central banks, which are now cutting or holding rates flat.

This has historically proven explosive for risk assets. When BOJ raised rates by just 15 basis points in July–August 2024, bitcoin fell around 20 percent from $65,000 to below $50,000 within a few days, driven by yen strengthening and automated margin calls in multi-asset funds. Crypto trades around the clock with immediate liquidity, making it one of the first asset classes to be sold when managers need to cover yen-denominated collateral requirements.

Alongside the rate hikes, BOJ is also reducing its balance sheet through a gradual tapering of government bond purchases. The IMF's board praises this implementation as "smooth," but calls for close monitoring of liquidity conditions in the bond market as Japanese government bond yields adjust upward.

For the Norwegian market, the direct link is limited, but tighter Japanese monetary policy is part of the same global liquidity picture that affects oil prices, the krone exchange rate, and risk appetite in general — factors Norges Bank follows closely in its own rate assessments.

A critical look at the source

It's worth noting that the IMF's recommendations are exactly that — recommendations from an external institution, not a binding forecast for BOJ's actual rate path. The Fund's own estimates for the neutral rate span a full percentage point (1.1–2.2 percent), something the IMF itself describes as subject to "significant uncertainty." Historical parallels to the 2024 shock in the crypto market are illustrative, but no guarantee that a future rate hike will produce the same market reaction.