The International Monetary Fund cautioned that Japan should be vigilant for potential spillover effects from increasing foreign market volatility that could impact liquidity conditions for its financial institutions. The IMF also highlighted the importance of monitoring the consequences of interest rate hikes by the Bank of Japan, foreseeing a rise in government debt-servicing costs and a potential surge in corporate bankruptcies.
The IMF emphasized the necessity for Japan to implement a robust debt management strategy, given the projected doubling of the cost of servicing public debt by 2030. It noted the increasing reliance on foreign investors and domestic institutions for government bond issuance due to rising gross financing needs and a contracting BOJ balance sheet.
Regarding the yen's fluctuations against the dollar, influenced by Japan-U.S. interest rate differentials and yen carry traders, the IMF pointed out the potential impact of foreign market volatility on domestic liquidity conditions, underscoring the importance of monitoring funding rates and liquidity distribution among banks.
The IMF commended Japan's commitment to a flexible exchange rate regime, crucial for absorbing external shocks and supporting the country's monetary policy objectives focused on price stability. Acknowledging Japan's recent steps towards sustainable inflation, the IMF advocated for a gradual increase in the BOJ's policy rate to avoid potential disruptions in the banking sector linked to faster interest rate hikes and escalating bankruptcies among smaller firms.