IMF urges Japan to keep raising rates, warns against sales tax cuts

The IMF has urged Japan to continue gradual interest rate hikes while warning against cutting the consumption tax due to fiscal risks. With inflation above 2% and the policy rate at a 30-year high, the IMF emphasizes the need for steady normalization. However, it cautions that reducing the consumption tax could erode fiscal space and increase future risks. The government’s proposals for fiscal loosening have already caused sensitivity in the markets, reflected in bond yields and the yen's reaction. The IMF suggests that the Bank of Japan should only intervene if market liquidity deteriorates, indicating that the tension between IMF recommendations and Tokyo's fiscal ambitions will remain a significant risk for investors.