CANBERRA Japanese Prime Minister Junichiro Koizumi touched down here Tuesday to begin his first official visit to Australia which is set to be dominated by talks on trade and regional security.

He was whisked off to his hotel shortly after arriving at Canberra airport aboard a flight from East Timor where he had discussions with its newly-elected President Xanana Gusmao.

Japan and Australia both have peacekeepers in East Timor and are large donors to the national development of the fledgling nation.

Peacekeeping duties, East Timor and regional security will also be the subject of talks here today between Koizumi, Prime Minister John Howard and key Australian ministers.

However, the key issue for the two close trading partners is likely to be the possibility of a bilateral free trade agreement which Koizumi said last week he wanted to explore.

Canberra has so far responded cautiously, warning that agriculture would have to be part of any free trade agreement, and acknowledging it is a difficult, if not insurmountable barrier, at least as far as Japan's powerful farm lobby is concerned.

Koizumi has also indicated Australia is part of his plans for an East Asian trade and economic bloc that would also include China, South Korea and the members of the Association of Southeast Asian Nations (ASEAN).

Foreign Minister Alexander Downer described Koizumi's visit as "a very important moment in the evolution of Australia's relationship with Asia".

"The Japanese prime minister is enormously welcome," Downer told AFP in Adelaide. "Japan is a great partner of Australia's, our largest trading partner, but increasingly a security partner as well in the Asia Pacific region.

"It's important we keep in line the very long term objective of a free trade agreement, but we can do a lot in the short term to move forward towards increasing trade between our countries."

Meanwhile, The Bank of Japan (BOJ) suggested Tuesday that feeble economic growth in Japan was possible in the year to March but continued contraction appeared more likely.

The Central Bank said in a forecast for the world's second biggest economy that Japan's gross domestic product (gdp) could shrink by 0.5 percent at worst or grow by 0.2 percent in the most optimistic scenario. The Japanese government has forecast zero economic growth in the year to March.

"Overall, Japan's economy is expected to stop deteriorating towards the latter half of fiscal 2002 but an anticipated autonomous recovery is not likely to gain much momentum," said the six-monthly forecast.

Increasing exports and the subsequent boost to industrial production are expected to help the manufacturing sector but the Central Bank cautioned jobs and wages remained under pressure from restructuring.