G8 summit to target Japan's banks

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Problems with Japan's banks will be front and center, as the world's top economies gather for talks in Genoa, Italy.

The heads of the Group of Eight most-industrialized nations gather for a summit starting Friday. They'll tackle economic and political issues through Sunday.

Prime Minister Junichiro Koizumi will be a rookie at this gathering of the world's most powerful leaders. Despite battling a head cold, the Japanese premier is determined to make a good impression.

The leaders of the seven other nations will press the importance of Japan's structural reforms, particularly with its banks.

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A U.S. treasury official told reporters in Washington that tackling the huge amount of nonperforming loans, or NPLs, with Japan's banks would be a focus of the talks.

There are steps each nation can take that are "good for economic stability," said John Taylor, under secretary for international affairs, including Japan's reforms and the U.S. tax cut.

Overseas governments, particularly the United Kingdom and the United States, rarely miss an opportunity to drive home the importance of reforms in Japan.

But officials will likely target support for speeding up bad-loan writeoffs at this summit.

"The Japanese NPLs are one of the focal issues of this G8," said Hironari Nozaki, Japan bank analyst with ABN Amro.

Support for rapid writeoffs

Koizumi and U.S. President George W. Bush, another G8 newcomer, already discussed the topic when they met in late June. U.S. officials keen to proffer expertise garnered in the savings and loan bailout.

Officially, experts expect little more than a statement supporting rapid bad-loan writeoffs out of Genoa. Koizumi has told Japan's banks to write off bad loans over the next three years.

But that doesn't deal with the large number of "gray area" loans likely to go bad. Privately, the G8 governments are expected to push Koizumi to deal with them.

Overseas business experts say Japan's banks are throttling its economy by continuing to trickle loans to inefficient companies.

Japan to skip bilateral U.S. discussions

Koizumi and his aides are holding sideline bilateral talks in Genoa with Russia, Italy, Germany and Canada.

Japan will likely skip one-on-one talks with the other G8 nations -- the United States, the United Kingdom and France -- because Koizumi met those leaders in June or July.

Though Koizumi's popularity is near record levels at home, Japan watchers want hard evidence he is different from past leaders.

"There are definitely high expectations of him, he is saying the right thing, trying to please everybody," said Jason Rogers, head of credit research at Barclays Capital. "But the proof is in the pudding."

Past prime ministers tried to spend their way out of trouble, to no effect. Koizumi promises to cut government spending.

But overseas investors worry that the initial "Koizumi effect" has fizzled. There has been little hard progress on reforms since he took office in April.

G8 likely to call for central bank support

The G8 countries will also likely press the central Bank of Japan to do more to help, via Koizumi.

Koizumi would use that as ammunition with BOJ Governor Masaru Hayami. Hayami, who won't be in Genoa, has refused to buckle to political pressure from Koizumi's cabinet to inject more cash into the economy.

The BOJ can only do so much, though, with interest rates close to zero. Because government spending hasn't revived Japan, either, that leaves only structural reforms to cure the world's second-biggest economy.

In the end, other governments can only try to ram home the importance of reforms. The Genoa talks will aim to keep reforms moving past Japanese elections on July 29, which some say have distracted Koizumi's efforts.

"He hasn't done any reforms yet, so they would like to see the results," said Tomoko Fujii, director of economic and market analysis at Nikko Salomon Smith Barney.

But G8 representatives know progress is likely to be slow, with Japan admitting it is already in recession. Reforms would likely hurt jobs and companies short-term, and pushing too fast could spell disaster.