A Japanese flag flutters at the Bank of Japan headquarters in Tokyo on July 29, 2022. (PHOTO / AP)

The International Monetary Fund on Thursday warned of "uncertainty" around the direction of Japan's monetary policy, saying a possible shift from ultra-low interest rates could have a significant impact on global financial markets.

The BOJ kept ultra-low interest rates on Friday but announced a plan to review its past monetary policy moves, laying the groundwork for new governor Kazuo Ueda to phase out his predecessor's massive stimulus program

Krishna Srinivasan, director of the IMF's Asia and Pacific Department, also pointed to risks surrounding Asia's economic outlook including from weakening exports to advanced economies, slowing productivity and a fragmentation of global trade.

"We see a risk that the global economy fragments into trading blocs," which could deal a particularly heavy blow to export-reliant Asia, Srinivasan said in a briefing at the Asian Development Bank's annual meeting in Incheon.

ALSO READ: Japan's monetary policy expected to shift under new BOJ chief

While most Asian central banks must keep tightening monetary policy, Japan remains an exception with inflation still moderate – though this could change.

"There is uncertainty around the direction of monetary policy in Japan, amid a rise in inflation," Srinivasan said.

"Changes in Japan's monetary policy that lead to further increases in government bond yields could have global spillovers through Japanese investors, who have large investment positions in debt instruments abroad," Srinivasan said.

"Portfolio rebalancing of these investors could trigger a rise in global yields, causing portfolio outflows for some countries," he added.

With inflation exceeding its 2 percent target, markets are rife with speculation the Bank of Japan (BOJ) could modify its bond yield control policy in coming months.

The BOJ kept ultra-low interest rates on Friday but announced a plan to review its past monetary policy moves, laying the groundwork for new governor Kazuo Ueda to phase out his predecessor's massive stimulus program.

ALSO READ:BOJ survey: Japan's business mood sours to 2-year low

Srinivasan said China's rapid recovery will likely lift exports in some Asian countries including South Korea.

While headline inflation is moderating in South Korea on lower energy prices, core inflation excluding food and energy costs has yet to come down decisively, he said.

That meant the Bank of Korea (BOK) must avoid a premature monetary easing, though it should also minimize the risk of tightening policy too much, he said.

"Taking these considerations together, the BoK has appropriately paused rate hikes in the February and April meetings, while keeping options open for further hikes depending on incoming data."