UPDATE 1-Japan official: Fall in G7 economies easing

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TOKYO, April 22 (Reuters) - A senior official at Japan’s Ministry of Finance said on Wednesday the pace of worsening in Group of Seven (G7) economies is easing, though the economic outlook remains weak.

The official said currencies would not be a major issue at a meeting of G7 finance ministers in Washington on Friday.

A G7 source said on Tuesday that euro zone countries are likely to tell the meeting that the economic crisis may be at its worst now and a recovery could follow unless downside risks materialise.

The Japanese official, a regular participant at G7 meetings, said there have been positive signs but downside risks are still much bigger than upside risks.

“It’s true that inventory adjustment is making headway and the pace of falls in exports is moderating globally. But I don’t know how we will reflect those developments in the G7 statement. We’re not in a situation to be optimistic,” the official said.

Finance ministers and central bankers from G7, which comprises the United States, Japan, Germany, France, Britain, Italy and Canada, are unlikely to focus on currencies in their talks. “It doesn’t seem it will be a major issue,” the official said.

He did not expect serious discussion on the world’s key currencies at G7 nor at a Group of 20 ministerial meeting to follow G7.

The issue drew attention after Chinese central bank Governor Zhou Xiaochuan said in March that the dollar could eventually be replaced as the world’s main reserve currency by the IMF’s Special Drawing Rights (SDRs).

“It’s a very interesting issue. But the dollar has become an important infrastructure for the world. And it’s very difficult to change infrastructures. So I don’t think there will be any meaningful discussion on that now,” the official said.

He said the G7 may discuss the U.S. financial system, adding that markets appear to be sceptical about recent earnings results of big U.S. banks.

“We’re very deeply interested in the stress tests the U.S. is doing. I don’t think we’ll have talks on specific banks but I think there will be talks on the U.S. financial situation.

Treasury Secretary Timothy Geithner, who will host both the G7 and G20 meetings, said on Tuesday most U.S. banks have enough capital to keep lending but a pile of bad debts is fostering doubts about their health and slowing a recovery. (Reporting by Hideyuki Sano; Editing by Michael Watson)