Japan's PM hopeful Takaichi urges BOJ to avoid raising rates

By Leika Kihara

TOKYO (Reuters) - Sanae Takaichi, Japan's minister in charge of economic security and a leading candidate in the ruling party's leadership race, said on Friday the central bank should not raise interest rates yet as the economy is on the cusp of emerging from stagnation.

"The economy is only starting to recover and on the cusp of fully eradicating a deflationary mindset, so we shouldn't tighten fiscal policy," Takaichi, who is emerging as a strong candidate for the leadership of the Liberal Democratic Party (LDP), said on her personal Youtube channel.

Consumer inflation may be exceeding the Bank of Japan's (BOJ) 2% target, but an index that excludes the effect of fresh food and energy has yet to exceed that level, she said.

"Japan hasn't yet achieved a happy situation where rising inflation is accompanied by higher pay and stronger consumption," she said.

"As such, the government shouldn't reduce fiscal spending. Interest rates shouldn't be moved up either," Takaichi said, calling for the need to boost consumer sentiment.

The LDP will choose a new leader on Sept 27, with the winner due to take over as prime minister due to the party's majority in parliament.

Incumbent Prime Minister Fumio Kishida announced last month that he would step down as LDP chief in September, effectively ending a three-year term as leader of the world's fourth-largest economy.

The BOJ ditched negative interest rates in March and raised short-term rates to 0.25% in July on the view the economy was making progress toward durably achieving its 2% inflation target.

BOJ Governor Kazuo Ueda has signalled the bank's readiness to raise rates further if inflation stays around 2% in coming years accompanied by solid wage gains, as it currently projects.

A majority of economists polled by Reuters expect the BOJ to raise rates again this year with more than three-quarters of them betting on a December hike. None in the poll projected a rate increase next week.

(Reporting by Leika Kihara; editing by Miral Fahmy)