By Leika Kihara
TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the central bank will "certainly" debate heightening overseas risks at a rate review this week, underscoring concerns among policymakers about the economic fallout of a U.S.-China trade war.
The trade frictions and slowing global demand have cast doubt on the BOJ's forecast that Japan's economy will continue to expand moderately, pressuring central bank to deploy additional monetary easing to underpin growth.
"As for recent overseas economic developments, there are strong downside risks regarding the Sino-U.S. trade friction and China's economy," Kuroda told parliament on Tuesday.
"We'll certainly debate such overseas developments" at the upcoming rate review, he said, but added that the BOJ is already keeping monetary policy ultra-loose.
At the two-day meeting kicking off on Wednesday, the BOJ is expected to keep monetary policy steady but signal its readiness to ramp up stimulus if growing overseas risks threaten the economy's modest expansion.
"The BOJ will guide monetary policy appropriately taking into account the impact overseas economic changes could have on Japan's economic outlook and the momentum for achieving our inflation target," Kuroda said.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around zero percent in an effort to accelerate inflation to its elusive 2 percent target.
Some analysts say the central bank could be forced to ease more if the U.S. Federal Reserve cut interest rates in coming months and trigger an unwelcome yen rise against the dollar in a blow to Japan's export-reliant economy.
Many BOJ policymakers are wary of deploying stimulus any time soon, given their dwindling ammunition and the rising cost of prolonged easing such as the damage years of near zero rates are inflicting on financial institution's profits.
Barclays (LON:BARC) expect financial markets to start factoring in the chance of additional easing at the BOJ's July policy meeting.
"We expect the BOJ to keep any actual easing measures on hold for now, instead strengthening its forward guidance" at the July meeting, their analysts wrote in a research note.