Bush-Mori meeting to tackle economy

Yoshiro Mori meets a U.S. State Department representative on arrival Sunday

In this story: Central bank cuts interest rates A 'courtesy call' Mori to pay respects in Hawaii RELATED STORIES, SITES

WASHINGTON (CNN) -- Economic policies were expected to top the agenda on Monday as Japanese Prime Minister Yoshiro Mori meets with U.S. President George W. Bush in Washington.

IN-DEPTH Mori's difficult decision   •  Q & A: Who will replace Mori?   •  Japan: A nation in crisis   •  Japan: What needs to change?   •  Profile of Mori   ALSO BOJ raises reserves, guides rates near zero Key crewman to testify as sub inquiry winds down   MESSAGE BOARD Japan: Prime Minister Mori

The meeting will be Bush's first with the Japanese leader since taking office in January.

The leaders also likely will discuss last month's collision between a Japanese vessel and a U.S. submarine. Nine people aboard the Japanese ship -- including four high school students -- were lost when the Ehime Maru sunk.

A U.S. military court of inquiry is investigating the incident.

Although Mori is considered likely to resign in the coming weeks -- a move speculated after he moved up elections for the leadership of his Liberal Democratic Party -- the two countries' financial problems prompted the meeting before any change in leadership.

Mori and Bush were expected to discuss coordinating economic policy to avoid a simultaneous recession in both countries. The slowdown in the United States has increased Japanese pessimism about Japan's ability to pull out of its slump, and concerns about Japanese banks and share prices are leading to a negative sentiment in U.S. markets.

The two leaders were expected to issue a joint statement about economic policy coordination, and set up a joint commission on the issue.

Central bank cuts interest rates

Mori's trip to Washington came on the same day that Japan's central bank announced that it would increase reserves parked at the Bank of Japan (BOJ).

The policy would push interest rates back to near zero in a bid to stop the economy from sliding back into recession.

The U.S. Federal Reserve's Open Market Committee meets on Tuesday to discuss U.S. interest rates.

The market also expects a cut, by at least half a percentage point and possibly as much as three-quarters.

Monday's BOJ meeting follows last week's admission by the Japanese government that a fragile recovery is stalling. Officials admitted the country is once again facing deflation after a decade-long slump.

Anxiety over the world's second-largest economy, particularly its banking sector, has led to jitters in global stock markets.

U.S. Secretary of State Colin Powell said last week that Japan's fragile economy could pose a security threat to the United States.

He told lawmakers the United States did not have a "laissez faire" attitude toward Japan and had intended to give Mori "the benefit of our thinking on this matter."

Bush is likely to remain upbeat in his official comments, as the two leaders reiterate their faith in the relationship between the two nations. But observers say the Bush administration will press for continued reform in Japan behind the scenes.

A 'courtesy call'

But experts say little concrete is likely to come of the summit on the economic front. Mori's unpopularity and tenuous political support at home may limit his effectiveness. Speculation suggests that Mori is likely to resign by May at the latest.

Political analysts characterized the meeting as a courtesy call. Bush has already welcomed the leaders of Canada, the United Kingdom, South Korea, Colombia and El Salvador.

Analysts say Bush will likely refrain from making overt recommendations on tricky political issues such as reform of Japan's banks.

Mori and Bush are, however, expected to issue a joint statement about economic-policy coordination and set up a joint commission on the issue.

Problems with Japan's economy have put pressure on the Japanese currency. Ahead of the summit, the yen was trading at 123 to the dollar, its highest in almost two years.

Bank reform and a possible injection of money by the BOJ would cause further weakening. Currency experts say an exchange rate of 140 to the dollar is not out of the question.

Mori is expected to raise the issue of a weaker yen with Bush. The Bush administration favors a strong dollar.

But a weak yen makes it tough for U.S. exporters to sell products to Japan and for U.S. companies to compete against Japanese imports.

Japanese government officials said Monday that the leaders would not discuss concrete exchange rates at the summit.

Analysts expect most of the discussion to be behind-the-scenes, perhaps leading to a reiteration of Bush's support for a strong U.S. currency.

"I don't expect we'll see anything overt in regard to the yen," said Ron Bevacqua, senior economist for Commerz Securities. "But we'll know what they've discussed and the market will get the signal."

Mori to pay respects in Hawaii

After the morning summit and a working lunch, Mori plans to travel to Hawaii on Monday evening.

On Tuesday, he is to visit the scene of the collision between a U.S. Navy submarine and a Japanese training vessel and lay flowers to honor the missing.

Mori was harshly criticized for his initial handling of the collision, choosing to finish a weekend round of golf after first hearing about it.

The U.S. Navy court of inquiry investigating the collision begins its third week Monday. Another sore spot in U.S.-Japan relations, the presence of U.S. troops and bases on Okinawa, is also expected to figure on the agenda.

A number of incidents in which U.S. military officers were accused of molesting local teenage girls has caused alarm among the Japanese public, and Okinawa's governor has called for a reduction in the number of troops stationed in Japan, currently about 47,000.

Bush also was expected to discuss relations with Japan's neighbors, particularly China and North Korea. Japan remains concerned about the missile threat from North Korea.

CNN.com Senior Writer Alex Frew McMillan, CNN Correspondent Rebecca MacKinnon and Reuters contributed to this report.

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Ministry of Finance
Bank of Japan

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