IMF says Bank of Japan can see through inflationary shock from Iran war

By Leika Kihara

WASHINGTON, April 15 (Reuters) - The Bank of Japan can see through inflationary pressures from the war in the Middle East as any second-round effects on broader prices will be limited, Rahul Anand, the International Monetary Fund's mission chief for Japan, told Reuters on Wednesday.

Anand made his remarks as surging oil prices from the conflict add to mounting inflationary pressures, and keep alive market expectations of a near-term interest rate hike by the BOJ.

Investors are focusing on whether the BOJ will raise rates at its April 27-28 policy meeting, chances of which have receded as fading hopes for an end to the U.S.-Israeli war with Iran keep markets volatile and muddy the economic outlook, sources have told Reuters.

While rising fuel costs from the war will push up headline inflation, the BOJ can stick to its plan of gradual rate hikes, as such price pressures won't de-anchor inflation expectations, Anand said in an interview on the sidelines of the IMF and World Bank spring meetings in Washington.

"Higher prices are less likely to feed into core inflation or wages, so we think that the second-round impact will be more moderate compared to other countries," he said.

"Even if there is a temporary spike in headline inflation, the BOJ can see through that and resume the withdrawal of accommodation at the same pace as if the baseline pans out," he said. "Unlike many other central banks, the BOJ has room to see through this shock."

But Anand said the BOJ must be data-dependent and flexible in setting policy, as uncertainty over the intensity and duration of the war presents risks to the growth and inflation outlook.

YEN LEVEL SHOULD BE DETERMINED BY MARKETS

Anand said the IMF maintains its view that Japan's inflation will converge to the central bank's 2% target by the end of 2027. It expects the BOJ to hike its policy rate three more times, to 1.5% from the current 0.75%, by around the middle or end of next year.

Aside from rising oil prices, a stubbornly weak yen has been a source of concern for policymakers by pushing up import costs and broader inflation.

Anand said Japan did not see a huge pass-through on inflation from a weak yen in 2025. The yen's depreciation also helped absorb some of the hit from higher U.S. tariffs, he said.

"There is no level of exchange rate that anybody can say is right. It has to be determined by markets, because it's an open economy with a free-floating exchange (rate)," Anand said when asked about the advantages and disadvantages of a weak yen on the economy.

(Reporting by Leika Kihara; Editing by Paul Simao)