By Leika Kihara
TOKYO (Reuters) - The Bank of Japan does not need to expand monetary policy in October even if it cuts its growth and price forecasts, as long as inflation expectations are well anchored, the IMF's mission chief for Japan said on Friday.
Kalpana Kochhar, who is also deputy director of the International Monetary Fund's Asia and Pacific Department, said there was scope for China to expand the yuan's
"What Chinese authorities are doing is what the IMF has recommended for a long time, which is to allow markets to determine the exchange rate," she said on Beijing's decision last month to devalue its currency.
"One benefit is that loosening the (yuan's) link to the dollar gives Chinese authorities some independence to conduct their own monetary policy," she told Reuters.
Kochhar said there was a good chance the IMF would cut Japan's economic growth forecasts for 2015 and 2016 in its next World Economic Outlook report as China's slowdown and sluggish Asian demand weigh on exports.
"So far the recovery in Japan this year has been frankly disappointing and bumpy," she said, adding that wage gains have been particularly weak despite a tightening labor market.
NO 'CURRENCY WAR'
Japan's economy contracted in April-June due to weak consumption and exports and analysts expect only a modest rebound in the current quarter, keeping the BOJ under pressure to further ease monetary policy.
The BOJ is likely to offer a bleaker view on overseas economies next week and may revise down its assessment on exports, sources say.
Some investors are betting the BOJ will ease at the end of October, when it is expected to lower its upbeat economic and price forecasts in a semi-annual review of its long-term projections.
But Kochhar said the BOJ does not need to respond to temporary weakness in the economy and instead should focus on inflation expectations - which have risen moderately - in deciding whether to deploy additional stimulus.
"The BOJ basically looks at inflation expectations and the output gap. Even if we were to lower our forecast, we see the output gap closing," she said.
"As long as there's not a very sharp decline in either, one could say (the BOJ is) on the right path."
Kochhar stressed that the BOJ's monetary efforts must be accompanied by government efforts to raise wages and deregulate the economy, in order for a sustained recovery.
She shrugged off the view China's devaluation could unleash a rush among central banks to depreciate their currencies with monetary easing, including by the BOJ.
"So far, the BOJ has responded appropriately (to market volatility). When there is market volatility ... the best response is to let the exchange rate move," she said.
"Exchange rate is not a target and has not been a target for the BOJ."