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.

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.

In a speech to business leaders, Naoki Tamura said that the central bank should raise rates to 1% or higher in the fiscal half starting in October.

The Bank of Japan must raise short-term interest rates to at least 1% by the second half of fiscal 2025 to contain inflation risks, board member Naoki Tamura said on Thursday.