TOKYO -(Dow Jones)- Japanese economic policy shouldn't be based on the assumption that long-term interest rates will stay below nominal gross domestic product growth for long, Economy Minister Kaoru Yosano said Friday.

"It's nice that long-term rates are now lower than nominal GDP growth" as that keeps the cost of financing Japan's public debt low, Yosano said in a regular press conference. "But it's too optimistic to think such a condition will continue for a long period of time," Yosano said.

"Our thinking shouldn't be pessimistic or optimistic. It ought to be neutral," Yosano said, suggesting that the government should take a tougher approach in improving Japan's tattered finances.

"It's hard to control long-term interest rate moves because they are basically determined by the market," he said.

Japan's fiscal deficit now stands around 150% of GDP, the highest ratio among industrialized nations. The government is seeking to reduce its deficit so that it can achieve a "primary balance," in which government spending is financed without fiscal deficit spending, by the early 2010s.

But the government's primary balance target is based on the view that long- term interest rates will stay below nominal GDP growth, keeping the cost of financing Japan's deficit low. Yosano has repeatedly said this assumption is too optimistic.

The government expects nominal GDP to expand 2.0% next fiscal year, against a projected 1.6% increase this fiscal year ending in March. The yield on the key 10-year government bond now stands around 1.450%.

-By Leika Kihara, Dow Jones Newswires; 813-5255-2929; leika.kihara@ dowjones.com

-Edited by Hugh Lawson (END) Dow Jones Newswires 01-12-06 2158ET Copyright (c) 2006 Dow Jones & Company, Inc.