IMF urges BOJ to keep raising rates even as Iran war poses new risks

By Leika Kihara

TOKYO, April 4 (Reuters) - The International Monetary Fund urged the Bank of Japan to continue raising interest rates, even as the Middle East war posed "significant new risks" to the country's economic outlook.

The proposal comes amid market expectations the BOJ will raise interest rates as soon as April in the face of mounting inflationary pressure from the conflict-induced spike in oil prices, and higher import costs blamed on the weak yen.

While growth is expected to moderate, due partly to the Iran war, gradual wage gains will underpin consumption, the IMF said in a statement issued from Washington on Friday after the conclusion of its policy consultation with Japan.

"Risks to the outlook and inflation are broadly balanced" with inflation expected to converge to the BOJ's 2% target in 2027, the IMF said.

In the statement, the IMF said its executive board commended Japan's "strong economic resilience" to global shocks and agreed the BOJ was appropriately withdrawing monetary accommodation.

"They noted that as underlying inflation converges toward the BOJ's target, gradual rate hikes toward neutral should continue" in a flexible, well-communicated and data-dependent approach, the statement said.

"Directors stressed the importance of maintaining a flexible exchange rate as a credible shock absorber," it added.

The BOJ ended a massive stimulus in 2024 and raised interest rates several times, including in December, on the view that Japan was on the cusp of durably hitting its 2% inflation target.

The central bank has stressed its readiness to keep raising rates on the expectation that underlying inflation will converge to its 2% target sometime from the second half of fiscal 2026 into fiscal 2027. Japan's fiscal year starts in April.

While rising oil prices hurt Japan's import-reliant economy, BOJ policymakers have signalled their concern they will add to inflationary pressures from years of steady wage gains and broader price increases.

The BOJ's slew of hawkish communication has prodded markets to price in a roughly 70% chance of a rate hike in April.

The yen's slide towards the key 160-per-dollar level has also kept markets on alert for the chance of currency intervention by Japanese authorities.

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

"We're ready to take all available means that are legally feasible, be it conventional or non-conventional," she told an online programme on Friday evening.

(Reporting by Leika Kihara; Additional reporting by Yoshifumi Takemoto; Editing by Kate Mayberry)