By Makiko Yamazaki and Tamiyuki Kihara
TOKYO (Reuters) -The Bank of Japan should be mindful of the risk of inflation accelerating due to the yen's prolonged weakness, as Japan's interest rates remain ultra-low, former top currency diplomat Toyoo Gyoten told Reuters.
"It's a matter of fact that Japan's interest rates have been simply too low, and that's undeniably contributing to the yen's weakness," said Gyoten, who was involved in the 1985 Plaza Accord, which saw five major economies agree to a concerted
devaluation of the dollar.
"Naturally, there's concern that if this situation is left unattended, it could accelerate inflation (through higher import costs). The BOJ really needs to take this into consideration," he said in an interview.
The BOJ exited a massive, decade-long stimulus last year and raised short-term rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target.
While consumer inflation has exceeded the BOJ's target for well over three years, governor Kazuo Ueda has vowed to go slow in hiking rates due to uncertainty over the impact of U.S. tariffs on Japan's economy.
The yen plunged to 38-year lows past 161 per dollar last year. It has partly rebounded, but has remained weak for much of this year and was last fetching around 147 on the dollar.
Gyoten, now honorary advisor to Mitsubishi UFJ Financial Group's main banking arm, said the yen's weakness would be corrected if Japan gradually moves toward further tightening, narrowing the interest rate gap with the United States.
"Looking at the yen's value from a historical perspective, it's still too weak. There's no reason why the yen shouldn't strengthen significantly from here," he said.
Gyoten, who became vice finance minister for international affairs in 1986, recalled the public outcry when the yen shot up in the aftermath of the Plaza Accord.
The BOJ responded with massive monetary easing to shield the exports-reliant economy from the currency shock. But the move fuelled asset bubbles that later burst, leaving deep scars on what is now the world's fourth-largest economy.
"Rather than trying to stop the yen's appreciation, Japan should have accepted a stronger yen and used it as an opportunity to reduce its dependence on exports and shift to a new growth model," he said.
Regarding lingering caution among export-oriented industries about a strong yen, he noted that the sentiment "has changed quite a bit from the past."
Unlike in earlier times when a strong yen was seen as inherently negative, there is now a growing awareness that the perspective of ordinary consumers has to be taken into account, Gyoten said, referring to households getting crunched by higher costs of living due partly to the weak yen.
(Reporting by Makiko Yamazaki and Tamiyuki KiharaEditing by Shri Navaratnam)
