NAGANO, Japan, May 29 - A member of the Bank of Japan's Policy Board said on Wednesday that a natural fall in the yen should be accepted but that currency intervention would work in case of excessive movements. "Fundamentally, I believe currency movements should be left to the market. If the yen weakens, I think that should be accepted," board member Miyako Suda told a news conference after meeting business leaders in the regional town of Nagano. She declined to comment on specific currency rates. Asked how much should be left to the market, Suda said: "I don't think anyone can say what levels reflect fundamentals. But if rates move where everyone thinks they are overshooting, the government can intervene. "When rates are truly excessive, currency intervention can be effective," she said. The BOJ, acting as the government's agent, intervened twice in the currency markets last week to weaken the Japanese currency, which has gained about seven percent against the dollar since the start of April. A rise in exports has helped Japan's economy, which is struggling to emerge from its third recession in a decade. But with domestic demand still weak, a strengthening yen could harm exporters' profits and potentially nip the recovery in the bud. Suda, 54, a former economics professor who joined the Policy Board in April last year for a five-year term, has also previously said she opposes targeting currency rates as a means of monetary policy. Suda also reiterated the BOJ's dominant view that adopting an inflation target was not a feasible option. The nine-member board was always discussing further monetary policy measures, she said, but declined to specify. In early November, Suda said the BOJ had not exhausted all means of easing monetary policy but had almost reached the limit in terms of traditional steps.

CYCLICAL RECOVERY EMERGING, BUT...
Earlier on Wednesday, Suda said Japan's economy was starting to recover but the financial sector posed a risk. "Although there are various risk factors, it appears Japan's economy is entering a cyclical recovery phase," Suda told the business leaders in Nagano. Both the government and central bank have upgraded their view of the convalescing economy for three straight months. Suda said financial sector weakness was the biggest domestic downside risk, and that the BOJ had actively provided funds to the money market to prevent instability stemming from lack of liquidity and to avert a sudden credit crunch. The BOJ sees Japan's potential growth rate as between one and two percent, she said. The growth is relatively low compared with other leading industrial nations. Japan needs to raise the rate by boosting productivity, which can only be achieved through structural reform, she added. She also said it was difficult to reconcile current growth in money supply of around three percent, as defined by M2+CD, with one percent potential growth. Saying that funds were being shifted from bank deposits to assets such as Japanese government bonds and trust funds, she added: "When fund shifts are occurring as they are now in the financial markets, changes in the money supply become detached from macroeconomic activity." At its latest two-day policy-setting meeting, which ended on May 21, the BOJ decided to maintain its current easing stance, keeping its liquidity target between 10 and 15 trillion yen ($80-120 billion), vastly exceeding the amount of funds needed in the money markets. Suda said slight alterations in the current account deposits at the central bank, which the BOJ currently targets, should not be taken as a signal for an easing or tightening stance. ($1=124)