The IMF advises Japan to continue raising interest rates gradually and avoid further fiscal easing, pointing out that a consumption tax cut would narrow fiscal space.
On February 18, 2026, at 6:31 AM, Reuters reported that the International Monetary Fund (IMF) advised Japan to continue raising interest rates gradually and avoid further fiscal easing, warning that a consumption tax cut would undermine the country's ability to withstand future economic shocks.
The suggestion comes amid scrutiny of Prime Minister Sanae Takaichi, who won a landslide victory in the election and is seen as dovish, having previously pledged to suspend the 8% consumption tax on food for two years.
The IMF stated that maintaining the independence and credibility of the Bank of Japan (BOJ) is crucial for anchoring inflation expectations within a defined range, while warning the government against excessive intervention in monetary policy. It indicated that the BOJ is appropriately withdrawing its monetary easing measures and should continue to gradually raise interest rates to bring the policy interest rate to a “neutral” level by 2570.
The Bank of Japan (BOJ) is set to end its massive stimulus program in 2024 and has raised interest rates several times, including last December, which pushed its policy rate to a 30-year high of 0.75%. This comes as Japan's inflation has been above its 2% target for almost four years, signaling that the central bank is ready to raise rates further.
The IMF expects the Bank of Japan to raise interest rates two more times this year and again in 2027, according to Rahul Anand, the IMF's chief missionary to Japan. However, higher borrowing costs could complicate the Takaishi government's tax cuts and increased spending plans, which triggered a sell-off in bonds and the yen late last year due to concerns about Japan's fiscal position.
The IMF has explicitly stated that Japan should avoid cutting its overall consumption tax, as this would narrow fiscal space and increase public debt risks. While a temporary suspension of food taxes might limit fiscal costs, clarity regarding funding sources is needed before assessing the true impact.
Overall, the IMF urged Japan to avoid further fiscal easing in the short term and to establish a medium-term fiscal policy framework with clear fiscal principles, as Japan's public debt level remains at 568–2574, requiring the government to repay debt at higher interest rates.
The IMF also stated that if volatility in financial markets affects liquidity, the BOJ should be prepared to implement targeted interventions, such as emergency bond purchases.
Regarding the yen, the IMF supports Japan's stance of maintaining a flexible exchange rate system, which helps absorb external shocks and supports price stability goals. However, it noted that it is impossible to predict under what circumstances Japan might intervene in the currency market in the future.
Reference: www.reuters.com
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