* Recent yen rise largely due to dollar weakness
* Mustn't step into forex market unless it moves abnormally
* Won't change forex reserves management policy for now
* Should cut new JGB issuance by more than Y1 trln in 2009/10
* BOJ has taken appropriate policy, no more rate cuts needed (Moves up reference to Fujii as contender for finance minister)
By Tetsushi Kajimoto and Sumio Ito
TOKYO, Sept 3 (Reuters) - Tokyo should not step into currency markets unless exchange rates move abnormally, a senior lawmaker in the new ruling party said, adding that a strong yen is good for Japan as it curbs import costs.
"We should be neutral on currency policy at least. There's no need to take policy steps to help the yen rise but it's wrong to try to boost exports by driving the yen low," Hirohisa Fujii, 77, seen as a contender to be Japan's next finance minister.
"Basically, a strong yen is good for Japan," Fujii a top adviser to the Democrats, told Reuters, adding that it would help reduce Japan's import costs and boost consumers' purchasing power.
The Democratic Party of Japan, which won Sunday's election by a landslide, has pledged to put more money into the hands of households in a bid to shift an export-reliant economy towards one that places more emphasis on domestic demand.
Fujii, a former finance ministry official, served as finance minister in an anti-LDP coalition from 1993 to 1994. Some within and outside the party expect him to take up a key role, such as finance minister, in the incoming government.
The dollar fell as low as 91.94 yen on trading platform EBS on Thursday, its lowest since July 13, as investors continued to cut greenback holdings after a weaker-than-expected U.S. private-sector jobs report on Wednesday. The U.S. currency later edged back to 92.37 yen.
The current yen rise largely reflects the dollar's weakness, Fujii said, adding that Japan could resort to intervention if the markets faced abnormally speculative yen-buying, but that this should be done in coordination with other countries.
Analysts say Tokyo's currency policy is unlikely to change in the near term under the Democrats, who are expected to take a pragmatic approach to the management of Tokyo's $1 trillion foreign exchange reserves, the world's second-biggest after China's.
"As long as the dollar is strong, reducing (Japan's dollar holdings) would be contrary to the nation's interests," Fujii said. "Under the current situation, it is unlikely that we will change the reserves (management policy)."
Japan's economy returned to growth in the second quarter, pulling out of its longest postwar recession, thanks in part to stimulus spending taken by governments around the world.
Fujii said the incoming government should cut planned new issuance of Japanese government bonds (JGBs) in the year to next March by over 1 trillion yen by revising an extra budget to fund stimulus spending. The outgoing government planned a record 44 trillion yen ($477 billion) in JGB issuance this fiscal year.
Fujii hailed policy steps taken so far by the Bank of Japan, which, with its policy rate near zero percent, decided in July to extend a raft of measures to support corporate finance until December from their planned expiry in September.
A Reuters poll shows analysts expect the BOJ to keep rates steady at 0.1 percent at least until March 2011.
Fujii said the current policy rate is appropriate and he sees no need for further BOJ easing for now even though the economy faces deepening deflation with Japanese core consumer prices falling a record 2.2 percent in July.
"The phenomenon of deflation has been caused by various factors. You can't expect to push up prices by cutting interest rates," he said. "The policy rate is appropriate at 0.1 percent." (Additional reporting by Kei Okamura and Yuko Yoshikawa; Editing by Michael Watson)