* Japan opposition: Should keep dollar as reserve currency
* Democrats will try to avoid any impact on currency markets
* Keeping U.S. dollar as key currency in Japan's interests (Adds background, detail and comment)
By Hideyuki Sano
TOKYO, July 8 (Reuters) - Japan should study ways to boost returns on its currency reserves, for instance by taking on some credit risk in its investments, an opposition upper house lawmaker said on Wednesday.
Tsutomu Okubo, a leading policymaker in the main opposition Democratic Party on financial issues, also told the Reuters Japan Investment Summit that it would be in Japan's interests to keep the U.S. dollar as the world's main reserve currency.
"There's no reason we should limit the dollar investment in the forex reserves to U.S. Treasuries," said Okubo, a former banker and now the party's deputy spokesman on finance.
"We should study various ways, such as taking credit risks or channeling some of the money to industry," he said. Polls show the Democrats have a good shot at wresting control from Prime Minister Taro Aso's business-friendly Liberal Democratic Party in an election for the powerful lower house that must be held by October.
The Democrats have pledged to pay more heed to the rights of workers and consumers than big business, while loosening the grip of bureaucrats on policy and reducing waste in public spending.
Okubo, a former currency trader, said any tweaks in currency reserves management should be crafted in a way that would avoid moving currency markets.
"For Japan to say that Japan will sell U.S. Treasuries is like shooting yourself in the foot," Okubo said.
Japan has about $1 trillion of forex reserves, the second-largest in the world after China. A large part of the reserves are thought to be in dollars, although the government does not disclose details.
He added that keeping the U.S dollar as the world's main reserve currency was in Japan's interests given Japan's huge holdings of the dollar in its reserves.
His stance is similar to that of the current LDP-led government, which has said it would be in no one's interests to drastically change the status of the dollar.
The Democrats have promised to adopt a diplomatic stance less reliant on close security ally Washington. But Okubo said that did not mean his party would seek an alternative to the dollar as the world's key currency.
He also said the party would respect the independence of the Bank of Japan and would not meddle in monetary policy.
Japanese public debt is seen soaring to 170 percent of GDP this fiscal year, the highest level among developed nations, and the result of repeated efforts to shore up the economy by deficit spending for more than a decade.
Okubo also reiterated the party's commitment to holding off on raising the 5 percent consumption tax for another four years. He said the party would instead focus on reviewing government spending and cutting wasteful projects.
But he acknowledged that voters would face a tough choice down the road. "Once we have uncovered all available funds, we will ask the public to choose between the option of ... generous social security with an increase in the consumption tax, or the option of low social security without a tax hike." (Reporting by Hideyuki Sano; Editing by Hugh Lawson)