President Bush said Monday he saw signs of a recovery in the U.S. economy and expressed his support for Japan's structural reform policy, saying Japanese growth was vital for the world economy.
Prime Minister Junichiro Koizumi, for his part, vowed after a meeting with Bush to overcome Japan's crisis of confidence and get the world's second largest economy back on track.
Bush said he and Koizumi had discussed economic, security and environmental issues that were vital to global stability.
"I told him that our economy is still in recession but that there are some hopeful signs that we are recovering," Bush told a joint news conference with Koizumi.
"There are some signs that the tax relief plan that we put in place is having a positive effect so that we are beginning to see some growth," Bush said.
Koizumi said he was making steady progress on reforms, but said he felt Japan had suffered a loss of self-confidence.
"Ten years ago we were over-confident," Koizumi said, referring to the era when Bush's father visited Japan as president. "Now we've lost confidence. But I would like to tackle structural reform with confidence and with hope."
Bush reiterated his support for Koizumi's reform agenda, saying structural reform was not an easy task but that he was confident Koizumi would push it through.
"I'm confident in this man's leadership ability, I'm confident in his strategy, and I'm confident in his desire to implement that strategy," Bush said.
"When he implements the strategy, it will help Japan's economy a lot. And that's important, important not only for our bilateral relationship it is important for the world's second largest economy to grow," he said.
"It will help the region and it will help the world."
Bush said Koizumi had briefed him on a wide range of policy steps, from the banking sector problems to deregulation.
"In our private discussion he said 'I want to make it very clear to you exactly what I intend to do.' And he talked about non-performing loans, the devaluation issue and regulatory reform. And he placed an equal emphasis on all three," Bush said.
The yen dipped briefly after Bush caused some consternation in the foreign exchange markets by referring to "devaluation."
A U.S. official, asked about the reference to "devaluation," said: "What they talked about in the meeting was deflation."
Generally, however, the markets had little reaction to the meeting. The Nikkei stock average closed 0.45 percent higher, and Japanese government bond prices were little changed.
The yen was unchanged on the day around 132.60 to the dollar. There are growing concerns at home and abroad that Koizumi's initial election pledges to restructure the flagging economy were being watered down by political opposition and his flagging popularity since he sacked his popular foreign minister.
Koizumi said he would take all possible steps to tackle deflation and prevent a financial crisis.
"Regarding deflation steps and measures to prevent a financial crisis, I will tackle them firmly. I will take all possible measures," Koizumi said.
"I will not loosen the reins on structural reform," Koizumi said. "There's absolutely no change in that path. My resolve has not been shaken..."
Koizumi is due to unveil a set of measures to combat deflation and promote the disposal of huge bad loans weighing down fragile banks by the end of February in the hope this will stimulate the economy.