RPT-UPDATE 2-Japan fires warning shots at rising yen

By Tetsushi Kajimoto and Rie Ishiguro

TOKYO, July 1 (Reuters) - Japanese policymakers lashed out at a rising yen on Thursday, warning that the currency's gains due to worries about the global economic recovery and Europe's financial woes could threaten Japan's tepid economic revival.

Bank of Japan board member Yoshihisa Morimoto, in his first press conference after joining the central bank, said he is watching the yen closely because it could hurt profits and sentiment. One of Japan's two deputy finance ministers also said a weak yen is 'generally beneficial' to the country's exporters.

The BOJ's April-June tankan survey showed on Thursday that big manufacturers turned optimistic for the first time in two years as a rapid recovery in exports has boosted corporate profits.

The outlook is less encouraging because export growth has started slowing and domestic demand could weaken as companies still have excess labour, economists say. The yen could be a worry for Prime Minister Naoto Kan, who is trying to convince voters before an election next week that his Democratic Party can spur growth and repair public finances with higher taxes.

'A stronger yen and weaker euro will affect firms' global competitiveness, profits and sentiment,' Morimoto said.

Morimoto, a former executive at Tokyo Electric Power Co , Asia's biggest utility, started work on Thursday, filling the final vacancy on the BOJ's nine-member board.

The yen edged higher on Thursday, with the euro dipping 0.1 percent to 108.09 yen. The euro fell as low as 107.50 yen earlier, nearing an 8-½ year trough of 107.30 yen hit this week.

The dollar was down 0.1 percent at 88.38 yen after striking a two-month low of 88.08 yen on EBS earlier.



EXPORTERS' PAIN

The yen's latest rise has brought it to levels that could cause pain to Japanese exporters if gains are sustained, with the BOJ's tankan survey showing the average forecast for the dollar/yen rate in the year to next March among large manufacturers is 90.18 yen.

A stronger yen erodes exporters' profits when repatriated and makes their products more expensive overseas.

Japan has not intervened in the currency market since March 2004 and is unlikely to resume intervention because it supports more flexibility in China's yuan, analysts say.

Japanese officials are more likely to stick to verbal intervention by trying to talk down the yen, analysts say.

'There's no use asking me about foreign exchange rates because I won't comment,' deputy finance minister Motohisa Ikeda said on Thursday, when asked about recent yen gains against other currencies and their impact on the Japanese economy.

'But I'm aware that they say, generally speaking, a weak yen is good for Japan which has a high weighting of export industries.'

Ikeda, speaking to reporters, also said he would not comment on specific currency levels.

He emphasised the government's stance of avoiding excessive yen rises so the country can achieve economic growth backed by both external and domestic demand, as pledged in its growth strategy aimed at achieving an average 2 percent growth over the next decade.

Japan's ruling Democratic Party faces a July 11 upper house election that it needs to win to forge ahead with policies including steps to rein in huge public debt, such as a possible sales tax rise in two or three years.

(Writing by Stanley White; Editing by Chris Gallagher)

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