By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - A weekend gathering of G7 finance leaders may expose a rift on issues ranging from currency and fiscal policies within the close-knit group of advanced economies, dashing Japan's hopes of mustering a coordinated policy response to spur global growth.
U.S. Treasury Secretary Jack Lew, Federal Reserve Chairman Janet Yellen and European Central Bank President Mario Draghi will be among Group of Seven finance leaders gathering in Sendai, northern Japan on May 20-21.
Japan has failed to bridge differences with the United States on the yen, with Washington dismissing Tokyo's concerns that recent yen rises are excessive and instead pushing for agreements against currency market interventions.
The rift may be evident at the weekend G7 meeting, diminishing prospects of an agreement beyond reiterating the importance for exchange-rate stability.
There is also no consensus on how much fiscal stimulus the global economy needs with Germany resisting calls from Japan and the United States for bigger spending.
Japanese policymakers are taming market expectations, saying Tokyo never intended the G7 nations to agree on joint fiscal action it sees as only possible in times of crises such as the collapse of Lehman Brothers in 2008.
The G7 will likely settle with a vague agreement on the need to deploy a "balanced" dose of monetary, fiscal and structural policies, officials involved in the negotiations say.
The result could be another meeting in which officials claim progress in pushing an agenda of structural reforms, rather than concrete steps to avoid a global recession.
"It's just a way to say you did something when you did very little," said Tamim Bayoumi, a visiting fellow at the Peterson Institute, a Washington think tank for international economics.
While no communique will be released, Japanese Finance Minister Taro Aso hopes to lay the grounds for a G7 leaders' summit to be held next week, where measures to address stagnant global growth will be high on the agenda.
For Japan's currency mandarins, the top priority in Sendai is to garner a G7 agreement on the importance of "exchange-rate stability," officials with knowledge of the negotiations say.
That will give Tokyo justification to intervene in the currency market if it considers any yen gains as excessive.
It may also be the most the G7 nations can agree on given differences between Tokyo and Washington on what is defined as excessively volatile yen moves.
Lew said on Friday his views have not changed on Japan's currency policies since a G20 meeting in April, when he told Aso that markets were "orderly" despite a rising yen.
He also said Japan has relied too heavily on monetary policy and needed to focus more on boosting domestic demand and pursuing structural reforms.
Japan insists that recent yen gains have been speculative and that a U.S. Treasury report including it in a new currency watch list did not constrain its currency policy. Aso has repeatedly threatened to intervene to stem yen rises.
"The United States will probably keep emphasising that countries shouldn't resort to competitive currency devaluations, while Japan will argue that excess volatility is undesirable," said a G7 source familiar with the negotiations.
"But no country, including the United States, will disagree strongly that exchange-rate stability is important," he said.
Japan had hoped to garner a G7 agreement on the need to ramp up fiscal spending but has received a cool response from Germany, which insists on fiscal discipline.
If the G7 nations share their concerns over weak global growth, however, premier Shinzo Abe may use it to justify delaying a sales tax hike and deploy fiscal stimulus to resuscitate Japan's fragile recovery, some analysts say.