Japan's PM hopeful Takaichi warns BOJ against 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 Saturday the central bank should maintain ultra-low interest rates to support the fragile economic recovery.

"Frankly, it was too early," she told a news conference gathering the nine candidates running in the race, when asked about the Bank of Japan's (BOJ) interest rate hikes this year.

"Interest rates ought to be kept low," said Takaichi, who is emerging as a strong candidate for the leadership of the Liberal Democratic Party (LDP).

Takaichi's remarks follow those she made on her personal YouTube channel on Friday stressing the need to maintain fiscal and monetary support for the 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.

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.

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.

Most of the LDP candidates have called for a spending package to cushion the blow of rising living costs, without elaborating on how to fund this additional cost.

An outlier was Taro Kono, minister in charge of digitalisation, who said boosting expenditure or maintaining generous subsidies won't necessarily prop up economic growth.

Japan must debate how to improve fiscal health, as rising interest rates will increase the cost of funding its huge public debt, Kono said on Saturday.

Another candidate and ruling party official, Toshimitsu Motegi, said the government could pay for various spending by tapping the huge reserves set aside for currency intervention.

While most of the reserves are currently invested in U.S. government bonds, Japan can consider investing part of the funds in other assets to reap better returns, Motegi said.

(Reporting by Leika Kihara; editing by Miral Fahmy)