IMF's Srinivasan cites uncertainty over BoJ monetary policy amid rise in inflation

“The IMF warned of "uncertainty" around the direction of Japan's monetary policy, saying a possible shift from ultra-low interest rates could have a significant impact on global financial markets,” said Reuters while sharing comments from International Monetary Fund’s (IMF) Asia and Pacific Department Director Krishna Srinivasan early Thursday.

The IMF Official also pointed to risks surrounding Asia's economic outlook including from weakening exports to advanced economies, slowing productivity in China and a fragmentation of global trade while speaking at the Asian Development Bank's annual meeting in Incheon.

Additional comments

Over the medium term, we expect the Chinese economy to experience a slowdown in productivity and investment, which will lower growth below 4 percent by 2028.

In addition, we see a risk that the global economy fragments into trading blocs.

There is uncertainty around the direction of monetary policy in Japan, amid a rise in inflation.

Changes in Japan's monetary policy that lead to further increases in government bond yields could have global spillovers through Japanese investors, who have large investment positions in debt instruments abroad.

Portfolio rebalancing of these investors could trigger a rise in global yields, causing portfolio outflows for some countries.

China's rapid recovery after the re-opening from pandemic-related curbs will likely lift exports in some Asian countries including South Korea.

While headline inflation is moderating in South Korea on lower energy prices, core inflation excluding food and energy costs has yet to come down decisively.

That meant the Bank of Korea (BOK) must avoid premature monetary easing, though it should also minimize the risk of tightening policy too much.

Taking these considerations together, the BoK has appropriately paused rate hikes in the February and April meetings, while keeping options open for further hikes depending on incoming data. 

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