In its World Economic Outlook report, the IMF projected Japan's economy to expand 1.1% in 2025, up from 0.1% last year and higher than the 0.7% growth estimated in July. It expects economic growth to slow to 0.6% in 2026, up 0.1 percentage point from the projection made in July.

An expected pickup in real wage growth will support private consumption, offsetting headwinds from uncertainty over U.S. trade policy and soft external demand, the IMF said.

The BOJ is likely to raise interest rates gradually over the medium term toward 1.5%, a level considered neutral to the economy, and consistent with keeping inflation and inflation expectations anchored at its 2% target, it said.

Japan's economy expanded an annualised 2.2% in the second quarter after a 0.3% gain in the first quarter on solid capital expenditure and a boost to exports from automakers front-loading shipments to beat U.S. tariffs.

However, new export orders fell in July, for the first time since December, and export values dropped, led by sectors most affected by tariffs, the IMF said, suggesting the fallout from higher U.S. levies could intensify in coming months.

Japan clinched a trade deal with the U.S. in July, under which Washington cut tariffs on automobile imports and spared Tokyo from punishing new levies on other goods in exchange for a $550 billion package of U.S.-bound investments and loans.

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target. It has kept rates steady since then.

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