Japan, despite its advocacy of the Kyoto Protocol named after its ancient capital, is far behind on meeting its own obligations under the treaty as its economy recovers from recession in the 1990s.

Japan is hoping to show its role as a leader in the fight against global warming when it hosts the summit of the Group of Eight major industrial nations in July at the northern mountain resort of Toyako.

Prime Minister Yasuo Fukuda recently announced a panel on the environment, which the government said late Wednesday would look at carbon trade.

The trade ministry is also considering setting up a panel on the idea, a trade ministry official said on Thursday.

'We are preparing to set up a panel on the premise of introducing a cap-and-trade system,' he said.

A carbon-trading system sets a cap on the amount of pollutants companies can emit and then forces heavy polluters to buy credits from companies that pollute less - creating financial incentives to fight global warming.

The Japan Business Federation, the country's influential business lobby, signalled it would drop its opposition to the idea.

'For the success of the Toyako Summit, Japan, which is chair of the summit, needs to think about the issue based on global trends,' said federation chairman Fujio Mitarai, who is also chief executive of camera and equipment maker Canon Inc.

'Each country has already been making efforts in reducing emission of carbon dioxide, which is a global challenge,' Mr Mitarai told a gathering of business people Wednesday in the western town of Oita.

The European Union has a carbon emissions trading system, while major US presidential candidates are supporting the introduction of a carbon trading market.

The United States is the only major industrial country to reject the Kyoto Protocol, arguing it is unfair by making no demands of emerging economies. -- AFP