By Makiko Yamazaki and Yoshifumi Takemoto
TOKYO (Reuters) - A prime potential candidate for Japan's next prime minister endorsed the Bank of Japan's policy of gradually raising interest rates, saying its normalisation of monetary policy could push down prices and boost industrial competitiveness.
"The Bank of Japan (BOJ) is on the right policy track to gradually align with a world with positive interest rates," ruling party heavyweight Shigeru Ishiba told Reuters in an interview.
"The negative aspects of rate hikes, such as a stock market rout, have been the focus right now, but we must recognise their merits, as higher interest rates can lower costs of imports and make industry more competitive," he said.
Japan's ruling Liberal Democratic Party (LDP) is set to hold a leadership election in September.
Ishiba, a four-time candidate for the party's president, has yet to officially announce his intention to run in the latest race, but regularly ranks high in voter surveys on future prime ministers.
He made the remarks after the BOJ's decision last week to raise interest rates and its readiness for further hikes roiled financial markets.
Japan's Nikkei stock average on Monday plunged in the worst sell-off since October 1987 on the prospect of higher rates and U.S. recession fears but recouped most of the loss on Tuesday.
"Japan's economy is largely driven by domestic demand," with exports accounting for just a fifth of its gross domestic product, Ishiba said.
"Even though some export-oriented companies are benefiting from the weak yen, there is no doubt a majority of people are more affected by higher prices stemming from the weak currency."
Ishiba said the general consensus on the ideal range for the yen is 110-140 per dollar, but he declined to comment on his own views on desirable currency levels. The yen traded around 144 to the dollar early Wednesday.
He also noted that higher interest rates would help market mechanisms work properly in the economy by promoting a shift of capital to companies with strong growth and boosting Japan's industrial competitiveness as a result.
Ishiba has long been a critic of former BOJ governor Haruhiko Kuroda's radical monetary stimulus, which was part of former premier Shinzo Abe's "Abenomics" policies to prop up growth.
The BOJ should explain to the public the merits of higher interest rates, Ishiba said, as Japan convenes a special parliament session later this month to discuss the latest market rout, where BOJ Governor Kazuo Ueda is likely to attend.
It will take time for benefits to materialise, he said. "There will be a time lag, for example, for the yen to start firming and import prices to go down."
He declined to comment how far the BOJ should raise rates, stressing that politics should not weigh into the central bank's monetary policy.