The goal of such an agreement would be to ensure that Japan's struggling economy returns to a steady course of growth, Kyodo said, citing unidentified informed sources. Mori left on Sunday for the United States and was scheduled to meet Bush on Monday. Japanese officials were not available for immediate comment on the report. The economic woes of the world's two largest economies as well slumping stock prices on both sides of the Pacific, are likely to dominate the summit on Monday in Washington and the two leaders are expected to announce the creation of a bilateral consultative body on economic policy. Japan is likely to pledge swifter structural reform, including deregulation and further opening of its markets as well as faster efforts to improve the health of struggling banks through efforts to dispose of huge bad loans, Kyodo said. In response to that Japanese pledge, the United States is likely to agree to tolerate a weak yen in line with its strong dollar policy despite opposition from U.S. businessesthat fear a loss of competitiveness, Kyodo quoted the sources as saying. However, Kyodo gave no indications of what was meant by a weak yen.

On a trade-weighted basis, the dollar on Friday was at its highest level since June 1986. The dollar shot to 22-month highs against the yen on Friday at around 122.92. Worries about Japan's problems are starting to become an issue in the United States, where on Thursday Secretary of State Colin Powell said meetings were going on among US officials about Japan's fragile economy and Powell warned this could even pose a security threat to the United States. Powell was direct, saying Japan's problems were too important for the United States to ignore. "We are concerned about the Japanese economy, and it has been a source of meetings with the new team," Powell told the House of Representatives Budget Committee. While the Bush administration has chosen a deliberate hands-off approach to advising the world's number two economic power what it might do to get back on track, anxiety about Japan is compounded because the number two economy has rapidly slowed. And the United States has reasons for concern about aneconomy that on Friday said it was in deflation for the first time since World War Two and has barely scraped free of a recession. While the United States badly wants Japan to reform its moribund economy and to play a bigger role in sustaining global growth, it also needs Japan as an Asian ally and as a source of investment capital to finance Americans' free-spending habits.

Mori, deeply unpopular at home where political maneuvering to replace him is intense, is visiting the United States as a lame-duck prime minister. Thus there are scant expectations for Monday's meeting between Mori and Bush, with the Japanese prime minister's remaining time in office likely to be brief. Mori will explain to Bush a set of economic stimulus measures considered by Tokyo, Kyodo quoted Japanese Ambassador to the US Shunji Yanai as saying in Washington. The Oval Office meeting between Mori and Bush will be followed by a working luncheon where talks will continue to focus on the economy, he said. Bush's top economic adviserLawrence Lindsey and Treasury Secretary Paul O'Neill were likely to attend the luncheon, Kyodo said. US Treasury officials have declined even to talk about a possible agenda or to say whether Treasury Secretary Paul O'Neill will meet Mori separately. It was unclear how much the planned consultative body could achieve. The establishment of the new organisation was aimed at alleviating widespread concerns that slowing economic activity in Japan and the United States, which together account for about 40 percent of the world's gross domestic product, could lead to a global recession, Kyodo said. Its structure could be along the lines of a proposal by Trade Minister Takeo Hiranuma for a round table group including government and private-sector representatives, it said.

The communique will also call for an early start to the next round of World Trade Organisation talks on trade liberalisation, Kyodo said.

(Reuters)