IMF approves Japan interest rate hikes as Middle East conflict adds new economy risks

Japan is heading into a harder patch, but the IMF still says the Bank of Japan should keep raising interest rates.

In a statement released from Washington on Friday after its policy consultation with Japan, the fund said the war in the Middle East has created “significant new risks” for the country’s economic outlook.

Even so, it said rate hikes should continue.

Markets expect another BOJ hike as oil, wages, and the weak yen keep feeding price pressure

Markets already expect the BOJ could move as soon as April as the conflict drives up oil prices, pushes import costs higher, and keeps pressure on the weak yen.

The IMF also said that risks to growth and inflation are broadly balanced and said inflation is expected to converge to the BOJ’s 2% target in 2027. Its executive board said Japan has shown “strong economic resilience” against global shocks and agreed that the central bank is appropriately withdrawing monetary accommodation.

The statement said that as underlying inflation moves toward the target, gradual rate hikes toward neutral should continue in a flexible, well-communicated, and data-dependent way. It also said a flexible exchange rate remains important as a credible shock absorber.

The BOJ ended its huge stimulus in 2024 and has raised rates several times since then, including in December, on the view that Japan was getting close to hitting 2% inflation in a durable way.

Japan’s central bank has made clear that it is ready to keep raising rates because underlying inflation is expected to reach 2% sometime from the second half of fiscal 2026 into fiscal 2027. Japan’s fiscal year starts in April.

Rising oil prices are bad news for an economy that depends heavily on imports, but BOJ officials have also signaled concern that higher energy costs could add to inflation already driven by years of steady wage gains and broader price increases.

After a steady run of hawkish messages from the central bank, markets have priced in roughly a 70% chance of a rate hike in April.

The currency story is adding more pressure. The yen has fallen toward the key 160-per-dollar level, keeping markets alert for the risk of intervention by Japanese authorities.

Finance Minister Satsuki Katayama issued a fresh warning against yen bears on Friday and said Japan stood ready to act against speculative moves in the currency market.

She said on an online program Friday evening, “We’re ready to take all available means that are legally feasible, be it conventional or non-conventional.”

Iran lets selected ships cross Hormuz as Japan-linked carriers start moving through the route again

Shipping data showed that since Thursday, three Omani-operated tankers, a French-owned container ship, and a Japanese-owned gas carrier have crossed the Strait of Hormuz, reflecting Iran’s policy of allowing passage for vessels it considers friendly.

Iran first closed the strait, a route for about a fifth of global oil and LNG flows, after U.S. and Israeli airstrikes on Iran at the end of February widened the conflict. It later said ships with no U.S. or Israeli links would be allowed through.

Oil and commodity markets have been watching closely for signs that traffic is resuming, because several ships escaped the blockade in earlier weeks only for activity to be followed by days of complete paralysis.

A container ship owned by France’s CMA CGM crossed on Thursday, the same day French President Emmanuel Macron said only diplomatic efforts, not a military operation, could open the strait.

Before entering Iranian waters, the vessel changed its AIS destination to “Owner France,” signaling its nationality to Iranian authorities. The vessels appear to have switched off their AIS transponders during the crossing because their signals disappeared from tracking data.

MarineTraffic and LSEG data also showed that two very large crude carriers and one LNG tanker operated by Oman Shipping Management exited the Gulf on Thursday.

Oman, which mediated talks between Iran and the United States before the attacks, criticized the strikes while those talks were still going on.

On Friday, Mitsui O.S.K. Lines said the LNG tanker Sohar LNG, which it co-owns, had crossed the strait, making it the first Japan-linked vessel and the first LNG carrier to do so since the conflict began.

Early Friday, about 45 ships owned or operated by Japanese companies were still stranded in the region, according to Japan’s transport ministry.

Another Mitsui-owned LPG tanker, Green Sanvi, left the Gulf through Iran’s territorial waters earlier on Friday and signaled its destination as “India ship India crew.” A Panama-flagged very large gas carrier, Danisa, used the same route and headed to China.

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