TOKYO (Reuters) -Japan must diversify trade ties beyond the U.S. market to mitigate risks and focus on partnerships with countries favouring free trade, Hirofumi Yoshimura, co-representative of the opposition Japan Innovation Party, said on Monday.

Tokyo should seek a "win-win" situation in trade negotiations, however, tariffs imposed by President Donald Trump show how the U.S. is a country risk for Japan - or a source of uncertainty that could hurt its economy, Yoshimura said.

"Japan should expand trade ties with countries that focus on free trade," such as Europe, and leave itself more options to protect its economy, he told Reuters in an interview.

"Instead of standing on just one, big pillar like the U.S., Japan should stand on, say, five to 10 smaller pillars. That's a better approach to avoid its roof from falling off."

The remarks came as Japan faces the risk of sustained, steep U.S. tariffs after stalled trade talks led to criticism by Trump that Japan was engaging in "unfair" automobile trade.

The views of small, opposition parties such as the Japan Innovation Party could gain importance after an upper house election on July 20, where Prime Minister Shigeru Ishiba's ruling Liberal Democratic Party (LDP) faces an uphill battle.

Recent media polls including one by the Yomiuri newspaper showed the LDP and its coalition partner Komeito may lose their majority in the upper house - an outcome analysts say could force Ishiba to step down or seek an alliance partner.

The LDP-Komeito ruling camp is already a minority coalition in the lower house, forcing Ishiba to seek the cooperation of opposition parties to pass some bills through parliament.

Ishiba maintained his hard-line stance on trade talks with Washington in a television programme on Sunday, saying Japan will continue to demand the elimination of U.S. automobile tariffs and "won't make concessions easily."

U.S. tariffs would add to woes for Japan's economy, which contracted in the first quarter as consumption took a hit from rising living costs.

Yoshimura said Japan must focus on deregulation to revitalise the economy and reforms to rein in its ballooning social welfare costs that are straining its finances.

On monetary policy, Yoshimura said the Bank of Japan (BOJ) should continue to phase out its ultra-loose policy but at a slow, cautious pace.

"Japan has a huge public debt and relies on debt issuance in guiding policy," he said. "In light of this situation, the BOJ must tread carefully in raising interest rates."