Tariff impacts lead to a 0.5% downward adjustment in economic growth expectations; IMF urges the Bank of Japan to "remain flexible" on interest rate hikes

According to the Zhitong Finance APP, the International Monetary Fund (IMF) has urged the Bank of Japan to remain flexible regarding further interest rate hikes, given the pressure on the economy and increased uncertainty caused by U.S. tariffs, and to make decisions based on data. Naida Choi, head of the IMF's Japan division, stated in an interview in Washington on Wednesday, "Our core view on monetary policy is that flexibility and data-driven decision-making are crucial during times of heightened uncertainty." "The Bank of Japan must comprehensively review all data and clearly communicate their interpretation of this data to the market to explain their decisions."

Choi's remarks came after the IMF released its latest World Economic Outlook report on Tuesday. This is the first report published since U.S. President Donald Trump intensified global tariff measures. The report not only downgraded global economic growth expectations but also lowered Japan's economic growth forecast for 2025 by 0.5 percentage points to 0.6%.

Like most other countries, Japan received a 90-day grace period for Trump's "reciprocal tariffs." The original tariff rate targeting this Asian ally was 24%, and Japan still faces a 10% base tariff, along with an additional 25% tariff on automobiles, steel, and aluminum products.

Choi noted that of the 0.5 percentage point downgrade in Japan's economic growth forecast, about 0.28 percentage points were directly attributable to tariffs, while the remainder was related to indirect impacts and increased uncertainty. Among the direct impacts of tariffs, nearly half stemmed from tariffs on the automotive and auto parts industries, which account for about 40% of Japan's exports to the U.S.

"We found that the damage caused by tariffs on automobiles and auto parts is the most significant, while the uncertainty surrounding trade policies also has a highly negative impact," the division head pointed out.

Choi indicated that based on the baseline scenario used by the IMF to compile its latest forecasts, she expects the Bank of Japan to continue raising interest rates, but at a slower pace than previously anticipated by the organization. The IMF's latest outlook report reiterated its view that the Bank of Japan will gradually raise the benchmark interest rate to around 1.5%, which is considered a neutral level, in the medium term.

Choi's call for caution aligns closely with recent statements from Bank of Japan officials. Bank of Japan Governor Kazuo Ueda stated last week that the central bank will closely monitor economic conditions to assess whether the economic outlook can be achieved. The Bank of Japan will hold a meeting next week to decide on monetary policy, and most economists expect the central bank to maintain the benchmark interest rate at 0.5%.

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

Choi pointed out, "In the future, Japan will face significant pressures from an aging population, elderly healthcare, and climate shocks. For us, Japan needs to control its fiscal revenue and expenditure as soon as possible and embark on a path of fiscal consolidation."