--Most Likely Communique To Have Only General FX Comment
--Japan May Be Asked To Boost Growth; Europe To Help Maintain Global Demand
--May Be Too Early For Direct Mention Of Need For More European Stimulus

By Matthew Saltmarsh

BRUSSELS (MktNews) - Although they will not be overly negative, official statements from the G-7 meeting this weekend will focus on weaknesses in the real economies in Japan and the U.S., while for the most part relegating currency issues, a senior G-3 source told Market News International.
The official said that the statement following the meeting of G-7 finance ministers and central bank governors in Palermo on Saturday will focus on macro weakn esses in Japan, the U.S. and to a lesser extent Europe.
"The U.S. economy is the key issue," the source said, "But there will also be mention of the weakness in Japan" and probably some lingering concerns about consumption in Europe.
"Obviously the speed of U.S. growth is declining and the Japanese economy is not presently in good shape. Comparatively, Europe is in better shape but it's not one hundred percent sure that consumption in Europe is that robust," he added.
G-7 financial communiques in the recent past have called on Japan to stimulate its economy and on the U.S. to address current account imbalances, but it has not yet been decided whether these calls will be repeated, the official said.
It would be "very surprising" if the communique stressed one country or region as the sole locomotive for world growth, but there will probably be reference for the need for Europe to maintain a solid growth performance in the light of slower U.S. activity and a still-stagnant Japanese economy, he said.
There have been suggestions in recent weeks that the International Monetary Fund and the U.S. Treasury might prefer some European monetary and fiscal easing if the U.S. economy remains sluggish in the months ahead.
But at the same time it is unlikely at this stage that Europe will be directly requested to implement further demand stimulus, but that doesn't mean the issue won't be discussed in closed-door sessions, the source said. The source also stressed that the statement following the meeting will surely not be overly pessimistic for fear of upsetting already fragile asset markets.
Of course exchange rates will be discussed at the meeting and there will almost certainly be some reference to them in the communique.
But the exact wording has not yet been finalised.
"The exchange rates themselves are not the key issue this time for Japan, Europe and the U.S.," the official said. "It's the real economy which is the focus."
The last communique called for a rebound in the euro and it appears unlikely that such strong wording on the euro would be repeated, particularly as EMU ministers have been much more sanguine in their public remarks on the currency in recent weeks.
"You might not get a reference to each currency this time," he said. "It could just be a more general comment."
This weekend's meeting will be the G-7 debut for new U.S. Treasury Secretary Paul O'Neill and that makes for some uncertainties, the source said. O'Neill has already re-asserted in front of Congress the need to maintain the strong dollar policy for the time being.
"We've got a new guy and a lot of questions are still open. What he wants and how he expresses himself in the G-7 is still unclear," the G-3 official said.
To date, O'Neill has focused on domestic fiscal policy and less on overseas issues and he has yet to name his permanent Treasury undersecretary for international affairs, the post which liaises with Europe and Japan.
Indeed, the source said that for this reason, there has been less contact than usual between the U.S., Japan and Europe ahead of this G-7.
In the past, Republican administrations have been more inclined to favor market forces than interventionist policies in the foreign exchange markets.