By Andrew Osborn and William Schomberg
ENNISKILLEN, Northern Ireland (Reuters) - The euro zone came under pressure from other rich economies on Monday to press on with a banking union and Japan was urged to follow up on massive central bank stimulus with structural reforms and measures to tackle its budget deficit.
Leaders of the Group of Eight rich nations, which include Germany, France and Italy, said a further strengthening of the rules underpinning the euro zone, including moves toward a banking union, was "strongly needed."
Euro zone finance ministers are due to discuss Europe's banking union plans on Thursday ahead of a European Union leaders' summit next week.
European officials are seeking to design a scheme to close troubled banks to complement a new system of cross-border supervision led by the European Central Bank from next year.
Germany, the euro zone's largest economy, has long worried that it could face potentially unlimited liabilities if countries in the single currency area pool their funds to cope with failing banks in the future.
In a statement which will form part of a final communique at a summit in Northern Ireland, the G8 leaders said the euro crisis had abated but the single currency area remained in recession, underscoring the need for reform.
The G8 also said Japan needed to address the challenge of defining a credible medium-term fiscal plan.
"Japan's growth will be supported by its near-term fiscal stimulus, bold monetary policy and recently announced strategy for promoting private investment," it said. "However it will need to address the challenge of defining a credible medium-term fiscal plan."
Prime Minister Shinzo Abe pledged last week to raise incomes by 3 percent annually and set up special economic zones to attract foreign businesses in the third tranche of measures aimed at boosting growth in the world's third-biggest economy.
But the measures have failed to convince investors, who doubt they would achieve the goals of the "Abenomics" policy given a lack of bold steps, such as changes to promote labor market flexibility and make it easier for companies to exit dying businesses while shifting to growth areas.
After holding bilateral talks on the sidelines of the summit, German Chancellor Angela Merkel said Abe had made clear he would undertake structural reforms in the foreseeable future and return to budget consolidation in the medium term.
"For me, it was very important to hear that Japan is thinking very strongly about structural changes," Merkel said.
The G8 statement said world economic prospects remained weak even though downside risks have lessened due partly to policy action taken in the United States, the euro zone and Japan.
"The U.S. recovery is continuing and the deficit is declining rapidly in the context of a continuing need for further progress towards balanced medium-term fiscal sustainability and targeted investments to enhance growth," the statement said.
Merkel recently appeared to clear the way for the next stage of a European banking union by accepting a "resolution board" involving national authorities to take decisions on winding up failed banks.
But that would involve little or no pooling of risk and Berlin would be unlikely to accept any scheme that could empower a foreign agency to force the closure of one of its banks or require it to pick up part of the bill if a bank in Spain, for example, failed.
(Additional reporting by Gernot Heller.; Writing by William Schomberg and Maria Golovnina.; Editing by Guy Faulconbridge/Mike Peacock)