IMF backs flexible yen, cautious rate hikes for Japan

The International Monetary Fund (IMF) threw its weight behind Japan’s commitment to a flexible exchange rate for the yen, as Reuters reported on Tuesday.

This move allows the Bank of Japan (BOJ) to focus on achieving price stability, as opposed to using monetary policy to prop up the currency.

“(IMF) Directors emphasised that a clear and effective communication strategy that continues to underscore factors behind the pace of policy rate increases will be key. They underscored that Japan’s longstanding commitment to a flexible exchange rate regime will help absorb shocks and support monetary policy’s focus on price stability.” the IMF said in a statement revealing the Executive Board’s conclusion of hte the Article IV consultation with Japan.

The IMF’s executive board acknowledged the challenges Japan faces with the weakening yen.

However, they cautioned against calls from some analysts to slow the decline through monetary policy adjustments. Instead, the board recommended a gradual and data-driven approach to further interest rate hikes by the BOJ.

The IMF also highlighted the importance of the BOJ’s flexible government bond purchases in mitigating excessive shifts in yields during this period of monetary policy normalisation. This strategy, they believe, can help safeguard Japan’s financial system.

These recommendations come amidst Japan’s struggles with a persistently weakening yen. The decline has caused headaches for policymakers, as it hurts consumer spending and inflates import costs.

It’s important to note that while the Ministry of Finance has the authority to intervene in the currency market, the BOJ acts as their agent, executing intervention orders when instructed.