Japan PM's adviser - BOJ buying foreign bonds is an option to weaken yen

By Kaori Kaneko and Sumio Ito TOKYO (Reuters) - The Bank of Japan could consider buying foreign bonds as an option to weaken the yen, if government intervention in the currency market is deemed by the United States to be exchange rate manipulation, an adviser to Prime Minister Shinzo Abe said on Tuesday. "Japan's monetary authorities should intervene in the currency market not to change the yen's general course but to discourage speculators - who bet too much on the rise of the yen - whenever it rises excessively," Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview. "If Japan's currency intervention is considered manipulation of exchange rates, BOJ buying of foreign bonds is an option for the same objective in a moderate form," he said. The Group of Seven industrial powers have committed to avoiding competitive devaluations while warning against wild exchange-rate moves. At a G7 meeting in Japan in May, U.S. Treasury Secretary Jack Lew told Japanese Finance Minister Taro Aso that it was important to refrain from competitive currency devaluations. "I think the government had a fairly stern warning from U.S. authorities not to intervene," Hamada said. He said BOJ purchases of foreign bonds is sensitive but it would help to dispel views that the central bank "has reached the limit" of its policy options. As exchange rate policy is the government's preserve rather than the central bank's, the Bank of Japan has avoided buying foreign bonds in the past. BOJ Governor Haruhiko Kuroda was Japan's top financial diplomat in his career at the Finance Ministry and repeatedly intervened to weaken the yen against the dollar, typically by selling large amounts of yen for dollars and using the proceeds to buy U.S. Treasuries. Kuroda has ruled out the BOJ buying foreign bonds to ease monetary policy because it can be considered as currency intervention. Japan last intervened in November 2011. The yen is far weaker than when Kuroda became central bank chief in early 2013, but the currency has rebounded some 20 percent this year against the dollar, raising worries in government that it could hurt Japan's exports. Japanese Chief Cabinet Secretary Yoshihide Suga told Reuters on Tuesday the government is ready to respond "appropriately", when asked whether Tokyo could intervene in the currency market to stem excessive yen rises. Hamada expressed hope that the Federal Reserve would raise U.S. interest rates, after top Fed officials made hawkish statements in recent days. "If the U.S. really delivers a rate hike, then it will be blessing for the Japanese economy and I don't need to persuade the finance ministry to intervene in the currency market as it naturally will lower the yen," he said. Turning to monetary policy, Hamada said it is difficult to say whether Bank of Japan will ease next month, before the next Fed rate decision on Sept. 21. "Some speculate that the BOJ may roll back its monetary policy. That would be the worst decision," he said. (Reporting by Kaori Kaneko and Sumio Ito, additional reorting by Chang-Ran Kim, Editing by William Mallard and Simon Cameron-Moore)