TOKYO Japan cannot solve its economic woes with a weaker yen, which could undermine international confidence in the world's second largest economy, Bank of Japan Governor Masaru Hayami warned Tuesday.

The yen has fallen below 130 to the dollar due to hopes for a recovery in the U.S. economy while Japan still has structural problems, Hayami said in a lecture to business leaders.

"What troubles me is that some people argue we should guide the yen lower beyond these market moves," he said.

"But we, the second largest economy in the world, cannot artificially control foreign exchange rates under the current environment in which capital funds can move freely.

"I am afraid if a large economy like Japan tries to solve its problems by manipulating currency rates, it would hurt international confidence in its economic management as well as its currency," Hayami said.

"We need to be fully aware that a lower yen would not solve various problems that the Japanese economy should overcome."

U.S. Treasury Secretary Paul O'Neill last week warned Japan against relying on a lower yen, saying it could do nothing to fix mountainous problem loans or to improve productivity.

The yen has lost around 10 percent in value against the dollar in the past three months, benefiting Japanese exporters by making their products cheaper abroad and boosting their repatriated profits.

Meanwhile, Japan's jobless rate hit a record high in 2001 as industrial production plunged due to weak demand, forcing firms to slash payrolls and households to cut back on spending, the government said Tuesday.

Over the year, the unemployment rate averaged 5.0 percent, its highest level since World War II, after hitting a new record high of 5.6 percent in December, the Ministry of Public Management, Home Affairs, Posts and Telecommunications said.

"I think the (number of jobless) will go on rising for the time being because industry is facing full-blown restructuring," warned Finance Minister Masajuro Shiokawa. "(But) I think the deterioration will not be so deep."

The number of people out of work in 2001 surged 200,000 to 3.4 million from a year earlier, exceeding three million for the third consecutive year as firms tightened their belts amid a deep recession.

"The environment surrounding the labor market is still challenging, and it will remain to be so, judging from ... such (leading) data as industrial output," a ministry official said.

[EECO]