By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese policymakers hit back on Wednesday at U.S. President Donald Trump's accusation of currency manipulation, stressing that Japan was abiding by a Group of 20 agreement to refrain from competitive currency devaluation.
Prime Minister Shinzo Abe defended the Bank of Japan's massive stimulus program, saying it was intended to reflate the economy and was not currency manipulation.
"Bold monetary easing is a necessary policy to accelerate economic growth and the United States is doing the same thing," Abe told parliament on Wednesday.
"If Japan's economy improves, that's not a bad thing for the United States," he said, adding that he will explain this point when he meets Trump next week.
The dollar was on the defensive after Trump and his trade adviser, Peter Navarro, on Tuesday criticized China, Germany and Japan, saying they were devaluing their currencies to the disadvantage of the United States.
Senior Japanese officials, worried about the pain a rise in the yen could inflict on the export-reliant economy, scrambled to contain damage as the dollar hit a two-month low of 112.08 yen <JPY=> on Tuesday, following Trump's remarks.
The top government spokesman told reporters it was "absolutely not the case" that Japan was devaluing the yen to gain an unfair trade advantage.
"Japan is guiding policy in line with agreements made by the G7 and G20 countries. There will be no change to that stance," said Chief Cabinet Secretary Yoshihide Suga, one of Abe's closest aides and the point-person on economic policy.
Masatsugu Asakawa, Japan's top currency diplomat, told reporters that exchange-rates were determined by markets and were not being manipulated.
"As Bank of Japan Governor (Haruhiko) Kuroda has said repeatedly, Japan's monetary policy aims to achieve the domestic purpose of ending deflation. It's not aimed at currency rates," Asakawa, vice finance minister for international affairs, told reporters.
"If he is talking about currency intervention, Japan hasn't done any lately," he added, referring to Trump.
Kuroda later told parliament the central bank would continue to promote "powerful monetary easing" to achieve its 2 percent inflation target as quickly as possible.
Trump's comments suggest that currency policy will be among main topics at talks between Trump and Abe in Washington on Feb. 10. Japanese media reported the two may hold another meeting in Florida the following day.
WON'T BIND BOJ?
Japan has not intervened directly in the currency market since November 2011. However, the weak yen has been considered one of the few successes of Abe's "Abenomics" stimulus policies aimed at pulling the economy out of two decades of deflation.
As one of three "arrows" of Abenomics, the BOJ adopted a massive asset-buying program in 2013. It was praised for boosting exporters' profits and brightening business sentiment through a weak yen.
The yen has fallen 20 percent against the dollar since then, but is off its lows of around 125 yen to the dollar in 2015.
While the yen spiked in the middle of last year, as investors bought it as a safe haven against global risks, like Britain's decision to leave the European Union, it slid versus the dollar again as U.S. bond yields rose on market expectations of Trump's inflation-stoking policies.
Japanese policymakers have argued that the BOJ's ultra-easy monetary policy is solely aimed at beating deflation and did not go against a Group of 20 agreement to refrain from using monetary policy for currency devaluation.
"There's no reason for the U.S. to criticize our currency and monetary policies," said a Japanese government official with knowledge of currency policy.
Trump's comments are unlikely to bind the BOJ's hands on monetary policy, said Kazuo Momma, a former senior BOJ official, adding that policymakers would not consider easing unless the yen spiked well above 100 to the dollar.
"Trump's comments could continue to create short-term market volatility, but the BOJ shouldn't respond to each and every remark he makes," Momma, who retains close contact with incumbent policymakers, told Reuters.
Naoyuki Shinohara, a former International Monetary Fund executive and previously Japan's top currency diplomat, said pressure by Trump should not hinder any necessary monetary easing by the BOJ.
Asked whether yen-selling intervention could become an option if the yen kept rising in the wake of Trump's remarks, Shinohara said: "Intervention probably won't be too effective."
(Additional reporting by Stanley White, Yoshifumi Takemoto, Hitoshi Ishida, Takashi Umekawa and Chris Gallagher; Editing by Lincoln Feast, Robert Birsel)