The Chinese yuan may rise more than 10 percent this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

China's currency has strengthened 1.4 percent this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005, as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China to stop keeping the yuan artificially weak to support exports.

``Chinese authorities now recognize that they need to appreciate their currency quite significantly for their own sake,'' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television.

A rising yuan would make Chinese goods more expensive in global markets, bolstering the competitiveness of Japanese exporters. The yen may advance as much as 12 percent against the dollar by the summer as the U.S. economy slows and the Japanese government holds off from any intervention to slow the rally, said Sakakibara.

The yuan traded at 7.1966 as of 1:51 p.m. in Shanghai, compared with 7.1970 at yesterday's close, according to data compiled by Bloomberg. The yen rose to 106.63 per dollar from 106.90 in New York yesterday. The yuan had a correlation of 0.86 with the yen over the past six months, according to data compiled by Bloomberg. A reading of 1 would mean the two currencies move in lockstep.

Too Bullish?

Sakakibara's year-end forecast for the yuan of around 6.57 is more bullish than the 6.80 median estimate of 32 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on an 8.4 percent advance to 6.6390 in the next 12 months.

Dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the finance ministry, Sakakibara predicts an advance in Japan's currency to 95 per dollar by the summer.

Sakakibara correctly forecast in an interview in October that the dollar would plunge against the yen because of the risk of a U.S. economic slump. He said today that Japan's central bank is unlikely to intervene to slow the yen's advance because the U.S. government is opposed to interfering with currency markets.

``Mr. Sakakibara is too bullish on the yuan,'' said Xinyi Lu, chief strategist at the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly trader lender. ``China is aiming for a soft landing on a plateau of slower growth without excessive appreciation of the yuan.'' The currency may end the year at 6.8, Lu said.

Rate Increase Debate

China has amassed record foreign-exchange reserves of $1.5 trillion as the central bank tempers strength in the yuan to prevent exporters' earnings from being eroded by currency gains that are too fast.

U.S. Treasury Secretary Henry Paulson and China's central bank Governor Zhou Xiaochuan have ``a tacit agreement to accelerate the appreciation of the Chinese yuan,'' Sakakibara said.

``With that kind of very heavy intervention in the foreign- exchange market, the tightening of monetary policy is extremely difficult,'' said Sakakibara. ``China would start to tighten and appreciate the currency quite significantly'' once the Cabinet is changed around March, he said.

China raised interest rates six times last year and pushed banks' reserve ratios to a 20-year high to try to prevent cash from record trade surpluses fueling inflation and stock and property bubbles.

The ``Chinese now recognize that they can live with a rapidly appreciating yuan and, as a result, they're letting the yuan appreciate more each day,'' Harvard University economist Martin Feldstein, head of the National Bureau of Economic Research in Cambridge, Massachusetts, said in an interview with Bloomberg Radio.

Sakakibara is a member of the Asia-Pacific advisory board of Bloomberg LP, parent of Bloomberg News.