Japanese finance minister Sadakazu Tanigaki and his Chinese counterpart have began talks with China's currency regime expected to be on the agenda.

Japanese Finance Minister Sadakazu Tanigaki, seen here in February 2006, urged China to introduce more flexibility in its currency regime, arguing that it was in China's interest to do so. [AFP]

Tanigaki was meeting with Jin Renqing during a one-day visit to the Chinese capital, a Japanese embassy spokesman said, amid souring diplomatic relations between the two major trading partners.

The talks are the first since the two ministers agreed in June to set up a new framework for regular meetings between finance ministry officials of the two Asian powerhouses.

"I would like to broadly discuss economic and fiscal situations in Japan and China as well as the Asian and world economies," Tanigaki was quoted by Kyodo news agency as saying in Tokyo Friday.

"The issue of the Chinese yuan and structural reforms in Japan's economy and finances may be taken up," he said.

Under pressure from western critics, China revalued the yuan by 2.1 percent against the dollar in July last year, scrapping its 11-year-old peg of about 8.28 yuan to the greenback in favor of a link to a basket of currencies.

Since then, the yuan has further risen almost three percent stronger against the US currency.

But critics say that doesn't go far enough and continue to accuse China of keeping the yuan artificially low in order to enjoy an unfair trade advantage.

The finance ministers may also discuss Japan's delayed approval of new funding for low-interest loan projects to China due to rising tension with its Asian neighbor, the Japanese embassy spokesman said.

For the first time since Japan began providing aid to its neighbor in 1979, Japan will not make the final decisions on loan projects by the end of the fiscal year which ends in March.

Bilateral relations between the Asian neighbors have steadily deteriorated, with China furious at Japanese Prime Minister Junichiro Koizumi's repeated visits to a shrine honoring war dead including World War II war criminals.

The aid is widely seen as a substitute for compensation over Japan's brutal 1931-1945 occupation of parts of China. Beijing has refused outright war reparations.