A rift on fiscal policy and currencies is likely to set the stage for G7 advanced economies to agree on a "go-your-own-way" response to address risks hindering global economic growth at their finance leaders' gathering on Friday.
As years of aggressive money printing stretch the limits of monetary policy, the G7 policy response to anemic inflation and subdued growth has become increasingly splintered.
Finance leaders gathering in Sendai, northeast Japan, sought advice from prominent academics, including Nobel Prize-winning economist Robert Shiller, on ways to boost growth in an informal symposium ahead of an official G7 meeting on Friday.
Participants of the symposium agreed that instead of relying on short-term fiscal stimulus or monetary policy, structural reforms combined with appropriate investment are solutions to achieving sustainable growth, a G7 source said.
If so, that would dash Japan's hopes to garner an agreement on the need for coordinated fiscal action to spur global demand.
Germany showed no signs of responding to calls from Japan and the United States to boost fiscal stimulus, instead warning of the dangers of excessive monetary loosening.
"There is high nervousness in financial markets" fostered by huge government debt and excess liquidity around the globe, German Finance Minister Wolfgang Schaeuble said on Thursday.
But G7 officials have signaled that they would not object if Japan were to call for stronger action using monetary, fiscal tools and structural reforms - catered to each country's individual needs.
That means the G7 finance leaders, while fretting about risks to outlook, may be unable to agree on concrete steps to bolster stagnant global growth.
"I expect there to be a frank exchange of views on how to achieve price stability and growth using monetary, fiscal and structural policies reflecting each country's needs," Bank of Japan Governor Haruhiko Kuroda told reporters on Thursday.
BREXIT HIGH ON AGENDA
The risk of a British vote to exit the European Union in a June referendum, or Brexit, will be high on the agenda at Friday's G7 session on the global economy.
"A Brexit could, in the short-term, lead to turbulence in financial markets," the G7 source said.
In second-day talks on Saturday, the G7 finance leaders will discuss, among other topics, the need to boost cyber-security.
While policymakers have long spoken about the need to enhance cyber-security as financial transactions become increasingly global, there is a growing awareness among G7 leaders that they need to take prompt action, sources familiar with the group's discussions say.
A cyber theft that hit a Bangladesh central bank account in February has led SWIFT, the global financial network that banks use to transfer billions of dollars every day, to warn that it was aware of a number of cyber incidents where attackers had sent fraudulent messages over its system.