The IMF has praised Japan’s commitment to maintaining a flexible exchange rate for the yen, stating that it will help the central bank focus on stabilizing prices. The IMF’s executive board also recommended that any future increases in the Bank of Japan’s policy rate should be gradual and based on data, due to the balanced risks of inflation and mixed economic signals.
The IMF highlighted that Japan’s flexible exchange rate regime will help absorb shocks and support the central bank’s focus on price stability. By purchasing government bonds in line with market developments, the Bank of Japan can prevent excessive fluctuations in bond yields that could harm the country’s financial system during its transition from ultra-loose monetary policy.
Japan has been facing challenges due to the persistent decline of the yen, which has negatively impacted consumption and the overall economy by increasing the cost of importing raw materials. The Ministry of Finance is suspected to have intervened in the currency market in April and May to slow the yen’s decline, as market expectations suggest that the Bank of Japan will not rush to raise interest rates after moving them out of negative territory in March.
In Japan, the Ministry of Finance has the authority to decide on currency interventions, with the Bank of Japan acting as an agent to execute these orders. The recommendations from the IMF come at a crucial time as Japan navigates through economic challenges caused by the weakening yen.