The International Monetary Fund (IMF) yesterday urged Japan to consider expanding the money supply when it intervenes in foreign exchange markets to prevent the strong yen choking off its economic recovery.

The IMF's call will step up pressure on the Bank of Japan, which opposes such a move - thereby threatening a possible deal on co-ordinated intervention to halt the rise in the yen.

In its twice-yearly world economic outlook, the IMF sharply revised up its forecast for growth in Japan from a preliminary forecast leaked two weeks ago. But Mr Michael Mussa, the IMF's chief economist, said this could be imperilled if the yen's recent rise continued.

The IMF also said the stimulus from government spending in Japan had to be maintained for "as long as the recovery in private demand has not firmly taken hold".

The call came ahead of a meeting of the Group of Seven industrialised countries in Washington this weekend, at which the subject of co-ordinated exchange rate intervention is likely to be discussed.

Hopes rose last week that the US would agree to joint action to weaken the yen. But observers say a deal will hinge on the Bank of Japan agreeing to leave the extra yen created by official intervention in the money markets rather than "sterilising" the intervention by subsequently withdrawing it.

The US will also have to be convinced that such action is in its interest.

Most of the individual country forecasts in yesterday's IMF outlook were unchanged from the preliminary forecasts posted on the Dutch finance ministry's web site earlier this month. But the unexpected news that the Japanese economy continued to grow in the second quarter after a huge 2 per cent rise in the first has caused the IMF to revise up its projections for the country.

The fund said it now expected the Japanese economy to grow by 1 per cent in 1999, compared with 0.2 per cent in the preliminary estimate and a fall of 1.1 per cent in its previous forecast, published last May. Its forecast for 2000 has risen from 1 per cent two weeks ago to 1.5 per cent yesterday.

The projection for world output growth in 1999 was revised up to 3 per cent from 2.8 per cent in the preliminary estimate and 2.3 per cent in May.

The IMF also raised its prediction of output in Russia this year from a fall of 2 per cent in the preliminary forecast to a flat outcome yesterday, saying a stronger fiscal position and rouble depreciation should help the economy.

The main risk to global growth was from a sharp slowdown in the US rather than the soft landing predicted in the baseline forecast, the IMF said.

Inflationary pressures which could prompt rises in interest rates, a decline in the dollar, a heavy fall in the stock market or a temporary boost to consumption through a large tax cut could all cause domestic demand to slow rapidly, it warned.

Mr Mussa said yesterday that, although sharp rises in US interest rates were not warranted, his personal preference was for one more rise before the end of the year.

The US Federal Reserve should then sit on its hands around the millennium, so as not to threaten the orderly functioning of financial markets, and consider the situation afresh in March or May next year, he said.