IMF expects BOJ to delay further rate hikes due to tariff uncertainty

By Leika Kihara

WASHINGTON (Reuters) -The Bank of Japan is likely to push back the timing of further interest rate hikes as uncertainty triggered by U.S. tariffs has heightened downside risks to growth and inflation, a senior International Monetary Fund official said on Wednesday.

The huge uncertainty surrounding U.S. tariffs and the response of other countries could dampen business sentiment and discourage some firms from sustaining wage hikes, said Nada Choueiri, deputy director of the IMF’s Asia Pacific Department.

The IMF still expects inflation will converge to the BOJ’s 2% target, though that will happen in 2027 rather than in 2026, as previously expected, said Choueiri, who is also the global lender’s mission chief for Japan.

“A lot of companies are likely now on the fence, not carrying out their investment plans and waiting for clarity on what’s going to happen. This is postponing investment decisions as well,” Choueiri told Reuters in an interview.

“We do see that if our reference scenario materializes, the BOJ interest rate increases will be pushed backwards in time,” she said. “Under a scenario where growth is dampened, the accommodation may need to be sustained for longer.”

Analysts polled by Reuters in April said they expected the BOJ would hold rates steady through June, with a 25-basis-point hike expected next quarter by a slight majority of respondents.

In its World Economic Outlook, the IMF said this week it expects Japan’s economy to expand 0.6% in 2025, down half a percentage point from January. It expects growth of 0.6% in 2026, down two-tenths of a percentage point from January.

“The balance of risks is on the downside for growth and for inflation,” as global uncertainty caused by higher U.S. tariffs could cool consumption and discourage firms from sustaining bumper pay hikes in next year’s wage talks, Choueiri said.

The BOJ, which ended a decade-long massive stimulus programme last year, raised its short-term interest rate to 0.5% in January in the belief the economy was on the cusp of sustainably achieving the central bank’s 2% inflation target. While Governor Kazuo Ueda has signalled the BOJ’s readiness to keep raising rates, U.S. President Donald Trump’s tariffs have complicated its decision on when and how far it can hike.

“If there is a big shock to domestic demand that threatens the chances of achieving sustainable 2% inflation, then countering that risk may require increasing the level of accommodation,” Choueiri said, when asked what it would take for the BOJ to contemplate cutting – rather than hiking – rates.