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Japan heads to G8 amid high oil

"Each country should focus on structural reforms, and (the G7 countries) have agreed on that." Japanese FM, said.

india Updated: Jun 02, 2006 13:32 IST

Japan heads to a meeting of finance chiefs from the world's wealthiest countries against a backdrop of simmering inflationary concerns from high oil and commodity prices, and uncertainty over interest rates which could reverse capital flows and roil financial markets.

While the global economy is still going strong, finance ministers have said costlier energy is a risk and have called for steps to ensure stable supplies.

Finance Minister Sadakazu Tanigaki said on Friday he expected oil prices and their impact on the global economy to be high on the agenda when ministers of the Group of Eight leading industrialised countries meet in St Petersburg on June 9-10.

The talks, to be chaired by Russia, are in preparation for the G8 leaders' summit in July, where the main topics include energy security, stemming infectious diseases and education.

Tanigaki said global imbalances would also be on the agenda, reiterating his stance after a G7 meeting in April that resolving such imbalances through exchange rate adjustments alone was not appropriate.

"To rely only on currencies is not the right path to take," Tanigaki told a news conference. "Each country should focus on structural reforms, and (the G7 countries) have agreed on that."

But exchange rates are not expected to be discussed this time as central banks will not participate in the meeting.

In April, the G7 called for reducing global imbalances -- namely the huge US current account deficit -- through more exchange rate flexibility in China and other emerging Asian countries.

That triggered a fall in the dollar as markets interpreted the statement as a sign for a managed dollar decline.

The G7 also called on countries with current account surpluses -- namely China and oil-producing countries which have

built up huge surpluses from surging oil prices -- to encourage domestic consumption and investment.

"In the context of energy concerns and global imbalances, the G7 are watching if so-called 'oil money' is being channelled into investment rather than into speculative trades," a source close to the G8 talks said.

"We are continuing to watch the risk of an economic downturn stemming from high oil prices, as well as changes in fund flows," he added, although he said such risks have not increased significantly since the G7 last met in April.

The G8 groups the United States, Japan, Germany, France, Britain, Italy, Canada plus Russia.

Jittery markets

But financial markets have been jittery since May on inflation risks and growing uncertainty about interest rates.

Stock markets, particularly in emerging countries, have taken a heavy hit and policymakers are on the watch for changes in capital flows after years of high liquidity and low interest rates.

"Capital flows to emerging countries respond strongly to interest rate developments in developed countries," Hans Genberg, executive director of the Hong Kong Monetary Authority, told a World Bank seminar in Tokyo on Tuesday.

Markets are focusing on whether the U.S. Federal Reserve will pause its tightening cycle after 16 consecutive rate hikes since 2004. Its next policy-setting meeting is on June 28-29.

The Bank of Japan, after ending its unprecedented policy of flooding the markets with liquidity in March, is expected to end an era of zero interest rates as early as July on the back of a firm economy and rising prices.

The US-based Economic Cycle Research Institute said on Friday that Japanese inflation pressures were flat in April but hovered near an eight-year high and would likely increase.

The G8 meeting may also include a session with other countries, possibly China.

Japan's top financial diplomat, Hiroshi Watanabe, said on Thursday that the session may focus on countries whose representation at the International Monetary Fund (IMF) is underweight compared with their economic weight. Many of these are emerging Asian countries such as China and South Korea.

The IMF is expected to come up with concrete proposals, including ad hoc increases in quotas, when it holds its annual meeting in Singapore in September.

The finance chiefs may also devote some time to addressing infectious diseases.

"One of the important issues is going to be health security, to make sure diseases like avian flu don't become global epidemics with huge impacts around the world," World Bank President Paul Wolfowitz said in an interview on Monday.