UPDATE 4-Japan opposition: must not make BOJ monetise debt

(For more stories on the Japanese economy, click [ID:nECONJP])

* Should consider ties with U.S. in forex reserves policy

* Opposition has good chance of winning Aug. 30 election (Recasts lead)

By Tetsushi Kajimoto

TOKYO, Aug 7 (Reuters) - Japan's main opposition party will not pressure the Bank of Japan to print money to buy government debt if the party wins the Aug. 30 national election, one of its lawmakers said on Friday.

Polls show the opposition Democratic Party of Japan has its best-ever chance of ousting Prime Minister Taro Aso's business-friendly Liberal Democratic Party. [ID:nSP57144]

The Democrats have lined up proposals to put more money in the hands of households, such as child care payouts and scrapping highway tolls. But some analysts fear its plans could inflate the huge public debt, already equal to about 170 percent of GDP and the highest among advanced nations. [ID:nT187305]

"There may be some room for the BOJ to help government finance, but we would not ask it to monetise government debt in advance," Kohei Otsuka, a vice finance spokesman for the Democratic Party of Japan, said in a meeting with market players.

"The finance authority should not press the BOJ to do so," said Otsuka, a former BOJ official and a party expert on economic and monetary policy, echoing the view of DPJ Secretary-General Katsuya Okada, who is seen as a candidate for finance minister if the party wins the election. [ID:nT183248]

Otsuka said the government and the central bank should share a common understanding on how to guide economic policy. One option could be for the two to agree on how to collaborate in rescuing Japan from recession, he said, but he did not elaborate.

While the party has said it would discuss how to manage Japan's $1 trillion of reserves, the world's second largest, after taking power, Otsuka said Japan should consider its relations with the United States in managing its huge reserves.

That may suggest an opposition victory would not drastically alter Tokyo's stance of holding its reserves mainly in dollars.

A DPJ victory in the lower house election would end more than five decades of almost unbroken rule by the LDP and could break a stalemate in a divided parliament, where the Democrats and their allies control the upper house and can delay bills. [ID:nT96465]

CURRENCY POLICY UNCHANGED

Japan's economy has been sideswiped by the global financial crisis that started in 2007 with a U.S. mortgage market meltdown.

The government has spent record sums on a stimulus package to beat recession, while tax revenues have been declining, fuelling the market view that government debt issuance may rise even more.

The BOJ has lowered interest rates to near zero and taken unconventional steps to limit the impact of the crisis, such as by buying commercial paper and corporate bonds from banks.

It has also increased its buying of long-term government bonds to 21.6 trillion yen ($226.4 billion) a year, though it says it has no plan to monetise government debt.

It has also said its buying is not aimed directly at pushing down bond yields, which rose in June on concern that increased government stimulus spending would lead to a debt oversupply. [ID:nT58195]

The BOJ is expected to keep interest rates on hold at 0.1 percent and hold off on any new policy initiatives when its board meets next week. [ID:nT255429]

While the economy is expected to have bounced back in April-June after four straight quarters of contraction, analysts say any recovery will be fragile as companies slash jobs and cut capital spending, weakening domestic demand. [ECILT/JP]

Otsuka said Japan's currency policy should be aimed at maintaining market stability, not at driving down the yen to boost exports, which matches Tokyo's current currency policy.

"If Japan wants exports to be a driving force for its GDP, a weak yen is desirable. But if it places more emphasis on personal consumption, a strong yen would be desirable as it boosts purchasing power," he said.

"But specific currency levels shouldn't be determined only by such factors. We would deal with currency policy by paying heed to market stability, while watching economic and market conditions."

The Democrats have vowed to put greater emphasis on personal consumption than other components of GDP such as exports and government spending. [ID:nT187305]

Japan's foreign reserves -- the world's second-biggest after China's -- ballooned as a result of its huge dollar buying intervention in 2003-2004, when it was desperately trying to stem the yen's gains to shore up the economy. [ID:nTKG006457]

Tokyo has not stepped into the market since then. ($1=95.40 Yen) (Writing by Leika Kihara; Editing by Hugh Lawson)