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Group of Eight finance ministers will hold a two-day meeting beginning Friday in Germany, with ensuring the transparency of hedge funds topping the agenda.

Finance Minister Koji Omi told a news conference Tuesday that the issue of hedge funds should be addressed in a balanced manner taking both their positive and negative aspects into account.

“A free market mechanism is very important and it is essential that various economic activities are conducted under the rule of the free economy,” Omi said.

“At the same time, we need to respond to possible adverse effects from them,” he said, referring to risks involving hedge fund activities in the financial markets.

As the balance of assets held by hedge funds has swollen to about $1.5 trillion, it is feared that any unilateral transaction by them could trigger volatile market moves.

Finance ministers from the G8 nations — Britain, Canada, France, Germany, Italy, Japan, Russia and the U.S. — are expected to devote considerable time to debating how to monitor hedge fund activities.

The talks will be held at a lake resort near Potsdam in preparation for the G8 summit next month in Heiligendamm, Germany.

Critics say the G8 is unlikely to agree on specific new regulations on hedge funds as the eight nations are divided on the issue.

Euro-zone members, including Germany, which is hosting the G8 finance ministers’ meeting, wants to enhance control of hedge fund activities through direct monitoring. The United States and Britain are reluctant to impose strict regulations.

Japan sides with the U.S. and Britain on the issue and prefers indirect controls on hedge funds by monitoring financial institutions that provide them with funds.

Makoto Utsumi, president of Japan Credit Rating Agency Ltd., said the G8 finance ministers are expected to agree on indirect controls on hedge funds this time.

“But their agreement will not be able to go further as the United States and Britain are opposed to tightening regulations,” said the former vice finance minister for international affairs.

In addition, the recent announcement that U.S. Treasury Secretary Henry Paulson will skip the G8 talks and send his deputy Robert Kimmitt instead has also clouded the prospect of any significant agreement on the issue and dampened momentum for the meeting.

Paulson’s absence is widely seen as a tit-for-tat with German Finance Minister Peer Steinbrueck, who skipped the Group of Seven financial meeting in Washington in April, citing a private family trip to Africa. The G7 is the G8 minus Russia.

The G8 finance ministers also are expected to discuss a range of other issues, including climate change, aid to African countries, energy savings and the fostering of bond markets in emerging economies, Omi said.

They are expected to reaffirm solid growth in the global economy despite recent signs of a U.S. economic slowdown, Japanese officials said.

The issue of exchange rates, which usually draws strong media and market attention at any G7 meeting, is unlikely to become a focal point this time because central bank governors will not take part in the event.

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