The Bank of Japan is likely to raise interest rates again this year and see borrowing costs reach levels deemed neutral to the economy by the end of 2027, a senior International Monetary Fund official said on Thursday.

Bank of Japan policy board member Naoki Tamura said, “Raising short-term interest rates to at least around 1% in the latter half of fiscal 2025 is necessary to reduce upside risk to prices and achieve the price stability target in a sustainable and stable manner.

Japan has “completely” ended deflation and it’s absolutely natural for the central bank to proceed with rate hikes to normalize policy, according to former BOJ Governor Haruhiko Kuroda, whose term was defined by ultra easy monetary settings.

The Bank of Japan must raise interest rates to at least 1% by the second half of the fiscal year beginning in April, hawkish board member Naoki Tamura said on Thursday, remarks that pushed up the yen as they reinforced bets of a near-term rate hike.

The Bank of Japan is increasingly blaming chronic labor shortages, not stagnant demand, as the main reason for its weak economic activity, a justification it may use to lift interest rates beyond what was initially expected.