Cracked

Finance officials from the Group of Seven industrial nations are at odds over the best remedy for a world economy rocked by the fallout from the U.S. credit crisis.

U.S. Treasury Undersecretary David McCormick this week urged the G-7 to ``take prudent steps'' to shore up growth, and U.K. Chancellor of the Exchequer Alistair Darling vowed to do so. The response from other members has been muted. Canada's Jim Flaherty ruled out ``large'' tax cuts, Germany's Thomas Mirow said the U.S. must do more and Japan's Hiroki Tsuda said he's ``cautious'' about using fiscal policy.

Finance ministers and central bankers from the G-7 meet in Tokyo tomorrow as evidence mounts that the U.S. is heading toward a recession and other major economies are slowing. Failure to agree on a joint response may further undermine global growth this year, which is forecast by the International Monetary Fund to be the weakest since 2003.

``There may well be a view that this is a U.S. problem for the U.S. to sort out,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Tensions might be bigger this time.''

The G-7 will release a statement around 6 p.m. in Tokyo tomorrow. The group, which consists of the U.S., the U.K., Japan, Canada, France, Germany and Italy, is also likely to discuss the U.S. and Chinese currencies and ways to improve financial regulation.

Forecasts Lowered

The meeting comes a week after the Washington-based IMF cut its forecast for global economic growth this year to 4.1 percent from the 4.4 percent it predicted in October. The IMF lowered its forecast for the U.S. to 1.5 percent from 1.9 percent.

U.S. officials are responding by lowering borrowing costs and giving consumers and businesses more money to spend. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $151 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of monetary policy since 1990.

Darling said in Tokyo today that ``our fiscal policy has to support the economy,'' reiterating comments made earlier this week that suggested he won't raise taxes in next month's budget.

Governments elsewhere have been more guarded.

``Japan needs to be very cautious about taking fiscal-policy steps to boost the economy,'' Vice Finance Minister Tsuda said yesterday. The IMF forecasts Japan's economy will grow 1.5 percent this year, down from 1.9 percent in 2007.

`Their Responsibility'

German Deputy Finance Minister Mirow said this week that the global slowdown has its origins in the U.S. ``and it's their responsibility.'' Canadian Finance Minister Flaherty said further tax cuts aren't likely after October's C$60 billion ($59 billion) five-year reduction.

``The aggressive pro-growth stance of the U.S. offers stark contrast'' to other G-7 nations, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

Central banks are offering some help.

The Bank of England yesterday reduced its benchmark rate for the second time since December, and European Central Bank President Jean-Claude Trichet reversed course and signaled he's open to cutting rates for the first time in five years.

``Uncertainty about the prospects for economic growth is unusually high,'' Trichet said in Frankfurt yesterday.

Regulations

Some European officials may counter U.S. requests for help on fiscal policy with a push for tighter rules on risk management. German Finance Minister Peer Steinbrueck will argue that banks should put more money aside for the loans they make, while the leaders of Europe's largest economies said Jan. 29 they were ready to increase regulations on banks and ratings agencies if they didn't provide better information.

Italian central bank governor Mario Draghi will present the preliminary findings of the Financial Stability Forum, the Basel, Switzerland-based group of regulators that was last year asked by the G-7 to examine the causes of the credit-market rout.

The weakness of the dollar, which has dropped 10 percent against the euro and 11 percent against the yen in the past year, is another likely topic.

Dollar Slide

The dollar's decline threatens to fan inflation in the U.S. as the cost of imports rises, erode the value of reserves held by Japan and other Asian nations, and make it harder for European exporters to sell their goods.

``It's the first time I've seen this constellation in a long time, and the preferences of the participants may come together,'' said Stephen Jen, Morgan Stanley's chief currency strategist, who is based in London.

This G-7 meeting may mark a shift from October, when the group's statement on currencies said China should allow its currency to appreciate faster, while omitting any mention of the dollar. Since then, the yuan has strengthened 4.5 percent against the U.S. currency.

``The G-7 can't just call on China to accelerate the pace of appreciation because they have done it already,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``The question is whether they welcome it or say it's not enough.''