By Swaha Pattanaik
Japan should lean towards some weakening in the yen's exchange rate, Koichi Hamada, the head of Japan's Economic and Social Research Institute, a government think tank said.
Hamada also told in an interview conducted late on Monday that he expected the Japanese economy to recover by the middle of 2002, helped by a rebound in the United States.
A recent battery of weak economic reports, including confirmation that Japan is in recession, have already driven the yen towards the year's lows against the dollar.
Against this backdrop, Hamada said yen depreciation would be beneficial for the country's economy.
"It is a better policy for Japan to lean towards some depreciation of the yen," he said.
Asked for his views on the euro, he said that while the European single currency had rebounded from the record lows it had plumbed in 2000, it was still probably worth less than economic fundamentals warranted.
"If the Japanese yen is overvalued, then the euro is undervalued," he said, adding that the single currency was "a good asset to hold."

EXTERNAL DEMAND THE MAIN HOPE
Hamada declined to give specific forecasts for how the Japanese economy would fare in the coming quarters but said he expected domestic demand to remain sluggish, with inventory adjustment and investment the only supportive elements.
He added that exports would remain the main engine for Japanese economic recovery.
"On the international side, by which the Japanese economy has been affected quite a lot, I am not so pessimistic because the U.S. economy has not lost so much supply capacity."
He said that Japan would benefit as economic activity picked up in the United States.
"The Japanese economy will hopefully have some positive signs in the middle of next year, unless it falls into a deflationary spiral," he said.
He said he was concerned about the Japanese economy's reliance on government spending but that this was not the time to cut back sharply, given the need to support economic activity.
While exports may be the Japanese economy's lifeline, Hamada said he could envisage a time, possibly by the end of the decade, when the country might run a trade deficit, given its ageing population.
"If you have households ageing very rapidly, it is kind of natural that they will spend some of the money they have accumulated.
"It may take some time, but I don't preclude it (the idea of Japan running a deficit)."
Hamada also said the Bank of Japan had repeated policy mistakes in recent years.
"The Bank of Japan kept making mistakes in the past five years," he said.
He said the procedure by which members of the central bank's policy-making board were appointed should be improved if politicians did not like the decisions made by past appointees.