TWO possible disputes at next week's Group of Seven summit - whether to give loans and aid to China and to the Soviet Union - threaten to isolate Japan as the odd-man-out among its Western partners. Prime Minister Toshiki Kaifu has so far refused to join Western Europe in considering aid for President Mikhail Gorbachev's moves to boost the ailing Soviet economy. At the same time, Mr. Kaifu will likely find little support in Houston for Japan's eagerness to help save China's worsening economy. Japanese officials say their double dilemma at the summit is caused by Japan being the only summit member in Asia, where there has been little thaw in the Cold War compared to that in Europe.
``In a nutshell,'' says Foreign Ministry spokesman Taizo Watanabe, ``there are some things we ourselves are watching carefully. And, we're also watching and paying attention to reactions of other countries in the West carefully.''
Japan, unlike the United States, is not openly opposing proposals by West European countries to extend aid to Moscow, such as the European Community's consideration of a $12 billion aid package.
But Japan is sticking to its long-held policy of withholding economic support for the Soviet Union until it signs a peace treaty and returns four islands taken by the Red Army at the end of World War II.
Japan, fearful that it might lose leverage with Moscow if other nations offer aid, is quietly seeking West European support for the return of the islands, particularly as Soviet Foreign Minister Eduard Shevardnadze is to make an important trip to Tokyo in September to prepare for a visit by Mr. Gorbachev next spring. In recent weeks, Japan has actively participated in meetings of NATO, a signal that it seeks greater linkage between security issues in Europe and Asia.
``There is no way for Japan to give the Soviet Union aid until this [territorial] matter is solved,'' says Noboru Hatakeyama, director general of the Ministry of International Trade and Industry.
Last week, an editorial in the Soviet Communist Party newspaper Pravda suggested that the four islands might come under joint economic management, perhaps with the United Nations.
``It is very interesting that Pravda carried such an article,'' said Mr. Watanabe, while reiterating Japan's stance for full return of the ``northern territories.''
Apart from the territorial issue, any Japanese aid to Moscow would depend on whether the Soviets put ``discipline'' into their economy to ensure that the aid is effectively used.
Prime Minister Kaifu says, ``It's not yet clear what kind of regime that country will have ... Opinions among summiteers may differ.'' Japan, however, is ready to train more Soviets in Japanese-style management, a project already begun last year.
The aid sanctions against China, which were agreed upon at last year's Group of Seven summit after the Tiananmen Square crackdown, have been followed by Japan up to now. Most notable has been Japan's suspension of a $5 billion credit for China.
But as Beijing has slowly released political prisoners, pressure is rising within Japan to help the Chinese economy and resume normal business and trade. In March, Japan began ``provisional preparatory work'' to resume the large credit program.
A member of China's Politburo, Li Tieying, held talks with Kaifu last week in Tokyo. Kaifu urged the high-ranking official to push for reforms in China, while at the same time, the Japanese leader said, he would try to convince his Western counterparts in Houston not to continue to isolate China. Japan, worried about possible political instability in its large neighbor, would like to begin a step-by-step de-freezing of its sizable credit to Beijing.
Japan, more than its Western partners, has a keen interest in a maintaining a stable China on its doorstep. While Japanese officials are not ready to deviate from their Western partners, they argue that China has been punished enough and that it should no longer be isolated from the Western community.
Japanese business interests, too, are keen to resume trade with the huge Chinese market.
``Japanese companies do not want American and European companies to take away that big market before their eyes,'' says Yoshinori Murai, a Sophia University professor.