Former Japan currency chief says FX intervention should be backed by rate hikes

By Makiko Yamazaki and Yoshifumi Takemoto

TOKYO, Feb 6 (Reuters) - Currency intervention using Japan's foreign exchange reserves can deliver an immediate jolt to markets, but its impact would be more durable if accompanied by steady rate hikes, a ?former top currency diplomat told Reuters.

Takehiko Nakao, who served as vice finance minister ?for international affairs between 2011 and 2013, made the remarks as the ?yen resumed its decline with Japan's election ?campaign entering its final ?stretch ahead of Sunday's vote.

"Intervention using actual funds can have a strong ?impact on markets, but its effects ?will be more lasting if the Bank of Japan also demonstrates a clear commitment to steadily raising interest ?rates," said Nakao, currently chairman ?of the ?Center for International Economy and Strategy.

The central bank raised its short-term policy rate to 0.75% in December and has signalled ?its readiness to keep pushing up borrowing costs. But real borrowing costs remain deeply negative with inflation exceeding the BOJ's 2% target for nearly four years.

Nakao blamed the yen's weakness on the BOJ's still-accommodative stance, saying the slow pace of rate ?hikes has ?left Japan's inflation-adjusted interest rates markedly negative and U.S.-Japan rate differentials wide.

"By responding appropriately to inflation through rate hikes, it ?may also be possible to curb excessive jumps in long-term government bond yields," he added.

The former diplomat warned that the yen could weaken further if the BOJ is slow to raise interest rates, citing the nomination of Kevin Warsh as the next Federal Reserve chair.

"Warsh is ?likely to adhere to the tradition dating back to former Treasury Secretary Robert Rubin that a strong, stable dollar is in the United States' interest," he ?said. (Reporting by Makiko Yamazaki and Yoshifumi Takemoto Editing by Shri Navaratnam)