Japan’s economy is expected to expand 1.4 per cent in 2023, faster than a 1.0 per cent rise last year, as the removal of pandemic curbs boosts consumption, the International Monetary Fund said, while warning that inflationary pressures were mounting.

Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters that Japan’s ultra-loose monetary policy could remain accommodative at the moment, but it should get ready to start raising interest rates given inflationary risks and recent strong wage negotiations.

“Our advice for Japanese authorities there is that right now, monetary policy can remain accommodative, but it needs to prepare itself for the need to maybe start hiking,” Gourinchas said at news conference. He added that the IMF was encouraging Japan to “be a bit more flexible and maybe move away from the yield-curve control that it has now.”

Inflation was now above Japan’s 2 per cent target and there was high risk that it would remain there, he said, without providing further details.

In an update to its World Economic Outlook report, the IMF cited “accommodative policies” as underpinning growth, as Japan maintains keeps interest rates low and continues big fiscal spending to cushion the blow from rising living costs.

Japan’s 2023 growth projection is roughly around the average 1.5 per cent expansion estimated by the IMF for advanced economies.

Growth in the world’s third-largest economy is expected to slow to 1.0 per cent in 2024 as the effect of past stimulus measures dissipate, the IMF said.

The Bank of Japan will conclude a closely-watched policy meeting on Friday, when it will issue fresh quarterly projections and debate how much progress is being made in sustainably hitting the inflation target.

The Bank of Japan (BOJ) will maintain accommodative monetary conditions for companies, Governor Kazuo Ueda was quoted as saying at a key government meeting on Wednesday.

While dollar/yen moves have been somewhat volatile due to US-Japanese interest rate differentials, Japan’s long-term interest rates have moved sideways under the BOJ’s yield curve control policy, a Cabinet Office official quoted Ueda as saying.

“Market sentiment continues to improve,” Ueda said, according to the official, who briefed reporters on discussions at the meeting to approve the government’s monthly economic report.

While long-term borrowing costs are rising somewhat, interest rates for short-term borrowing and commercial paper are very low, Ueda was quoted as saying.

Ueda’s quoted remarks come ahead of a closely watched BOJ policy meeting that ends on Friday, where the board will produce fresh quarterly projections and debate how much progress Japan is making in sustainably achieving its 2 per cent inflation target.

Japan’s Nikkei share average inched lower on Wednesday, led by declines in auto and tyre makers, as investors locked in profits ahead of the Bank of Japan’s two-day policy meeting this week.

The Nikkei index inched down 0.04 per cent to close at 32,668.34. The broader Topix slipped 0.1 per cent to 2,283.09.

“There were no negative cues to sell stocks. Investors were just cautious ahead of the central bank decision,” said Shoichi Arisawa, general manager of the investment research department at IwaiCosmo Securities.