The Kaifu administration is struggling to come up with cogent arguments for lifting economic sanctions against China, with the aim of presenting such arguments by the time of the Houston summit meeting in July.

Several of Prime Minister Toshiki Kaifu's closest aides want to resume Japan's $5.4 billion loan program for China, but they have yet to develop any positions that might persuade President Bush and the leaders of Europe's major industrial states.By the time of the summit, Japan hopes, most Western leaders will have agreed to eliminate the sanctions and restore economic assistance to China. Even so, there seems little likelihood that the World Bank will soon lift it own ban on financial assistance to China.

The seven largest Western industrial countries applied sanctions against China after the Tiananmen Square massacre of pro-democracy demonstrators last June.

Now, however, executives of Japan's major corporations are pressuring the Japanese government, insisting that it is imperative to remove the sanctions as soon as possible.

Japan's business leaders complain that the embargo on the third yen loan package, covering a five-year period starting this year, is an absolute prerequisite for resuming sales to China.

Even small and medium-size Japanese companies are protesting to the Kaifu administration about the situation. In fact, the smaller exporting corporations have suffered the most from the loan freeze.

An official of the Association for Promotion of International Trade of Japan, a group that encourages East-West trade, stressed that both big and small Japanese companies dealing with China are now entering the toughest period because major new export contracts at the very least should now be in the late stages of negotiation.

He explained that if the sanctions remain in place much longer, there will be a period of many months without orders. Since some of these manufacturing and export houses depend heavily on sales to China, it could prove disastrous for a number of them.

"No business has been done by us with China at all for the past year," said a senior executive of one of Japan's medium-size trading houses. "If this situation continues for another half-year, we'll really be in serious trouble."

Japanese consumer product manufacturers report that they have growing inventories on hand of goods produced for the Chinese market that they can't unload until Japan's loan funds are freed.

Statistics released by the Japan External Trade Organization show that Japanese exports to China are running at between 40 percent and 50 percent below their level in the first half of 1989. The agency also cited contract figures obtained from 18 domestic trading companies showing that exports to China suffered not only from the sanctions but also from Beijing's austerity program and the scarcity of foreign currencies.

"Certainly, an uncomfortable uproar could be expected in the U.S. Congress if Japan should suddenly choose to unilaterally remove its sanctions and make the loan funds available to China," one Foreign Ministry official remarked. "We have strongly advised against such a move."