By Leika Kihara and Yoshifumi Takemoto

TOKYO, Reuters – Japan’s ex-top currency diplomat Hiroshi Watanabe stated on Thursday that tightening monetary policies or intervening in currency markets will not reverse unwelcome yen falls that have inflated already rising fuel prices and raw materials.

Japanese policymakers are used to fighting sharp rises in the yen that could damage exports. They issue verbal warnings and currency interventions, but remain cautious about yen drops.

However, the recent weakness of the yen — which has fallen more than 3% against USD so far this month — has prompted concern among politicians. They worry about what it might do to retailers and households through higher fuel costs and food prices.

Watanabe suggested that the value of the yen (now hovering around 118.90yen) could drop below 120 dollars, which would put pressure on Japan’s resource-poor and import-reliant economy.

“The Bank of Japan keeps stating that weakening the yen is good news for the economy. It’s not certain if it can continue saying that if prices rise,” Watanabe stated. She maintains close contact to BOJ Governor Haruhikokuroda.

He told Reuters that policymakers couldn’t stop the yen from falling, but he said there were few things they could do.

Watanabe stated that “intervention to stop the yen falling” won’t work due to the large global currency market.

Inflation is not going to be reduced by tightening monetary policies. The BOJ cannot increase interest rates the same amount as the U.S. Federal Reserve.

Watanabe stated that the BOJ does not need to adjust interest rates under current circumstances. It would be a waste to tighten the screws now.

Watanabe’s remarks, which he oversaw Japan’s currency policy between 2004 and 2007, highlight the dramatic shift in Tokyo’s perception of the yen’s movements as Japan’s economic structure changes diminish the value of a weaker yen.

Watanabe stated that “the basic position of a central banking institution must be to try and increase the value its currency.”

He said, “For the government the key is coming up with a strategy to allow Japan to run trade surpluses and current account surpluses,” by encouraging new businesses.