TOKYO, May 12: The IMF, with an enhanced role in monitoring global imbalances, will look at how an expected rise in Japanese interest rates could affect emerging Asian markets when it meets Tokyo officials next week for an annual check-up.

The International Monetary Fund, in its so-called “Article IV” consultations, will also likely ask for the Bank of Japan to promote growth and ensure that seven years of deflation is truly gone, officials close to the discussions said.

The talks come amid growing speculation that the central bank could raise short-term interest rates, currently virtually zero, for the first time in six years as early as next month on the back of a solid economic recovery and rising prices.

The IMF consultations have been broadened this year to cover how domestic policies affect other economies after the lending institution gained new powers to address global imbalances — namely the swelling US current account deficit.

For an economy of relative scale, rather than just looking at Japan in a closed fashion, the Article IV consultations will look at how policies would affect the surrounding economies, Japan’s top financial diplomat, Hiroshi Watanabe, told reporters earlier this week.

The consultations will take place in Japan at around the same time as in other major economies such as the United States, the euro zone and China, according to international monetary sources who declined to be named.

Based on findings from those bilateral meetings, the IMF may work out measures to tackle global misalignments, they said.

The IMF’s steering committee said at its April meeting that the institution’s surveillance would focus on spillovers and links between member countries’ fiscal, monetary and exchange rate policies.

IMF Managing Director Rodrigo Rato will have the authority to bring nations together on an ad hoc basis to thrash out any economic misalignments based on IMF analyses.

It will be up to the IMF to point out inconsistencies among the various requests and demands of various countries, Japan’s Watanabe said.

The IMF will also likely urge Japan to promote domestic demand-led growth to help address global imbalances.

Unlike China, Japan is not expected to be called on to use exchange rate policy to help lower its current account surplus, the sources said.

While some analysts say a steep dollar fall is necessary to reduce the US current account deficit, IMF’s Rato has pointed out that the US deficit was the flip side of large surpluses at oil exporters and China.

The IMF, in the annual consultations with Japan, is also likely to reiterate the need for further structural reforms, including fiscal consolidation. Years of pump-priming have put Japan’s public debt at 150 per cent of gross domestic product, the largest among major industrial countries.—Reuters