IMF urges Japan to raise rates, keep fiscal stimulus targeted

By Leika Kihara

WASHINGTON, April 16 (Reuters) - Japan should gradually raise interest rates and keep any fiscal stimulus targeted given robust domestic demand and steady wage gains, a senior International Monetary Fund official said on Thursday.

The remark came ahead of the Bank of Japan's policy meeting later this month where the board will scrutinize the balance between economic headwinds and inflationary pressure from the Middle East war, in deciding whether to raise interest rates.

"Growth has held up quite well in Japan," with domestic demand strong, wage growth turning positive and annual wage talks delivering robust pay hikes, Krishna Srinivasan, director for the IMF's Asia Pacific Department, told a news conference.

"Our advice to the BOJ is ... to be data dependent and gradually start increasing rates going forward," he said, adding that inflation is seen converging to the BOJ's 2% target by 2027.

On fiscal policy, Srinivasan urged Japan to provide targeted support and use fiscal buffers "wisely."

Japan has deployed subsidies to curb gasoline and utility bills, as part of efforts to cushion the blow to households from rising living costs - a move that adds to the country's already huge debt pile.

An advocate of expansionary fiscal and monetary policies, Prime Minister Sanae Takaichi has proposed ramping up spending to boost economic growth and voiced reservations in the past over the BOJ's rate-hike plans. (Reporting by Leika Kihara; Editing by Andrea Ricci)