UPDATE 3-BOJ examining easing monetary policy again-Nikkei

(For more stories on the Japanese economy, click [ID:nECONJP])

* Finmin Kan: Would welcome any further BOJ measures

* Expanding fund-supply operation most likely option -Nikkei

* Decision may come either in March or April - Nikkei

* Increasing govt bond buying unlikely an option - Nikkei (Adds details)

By Linda Sieg and Leika Kihara

TOKYO, March 5 (Reuters) - The Bank of Japan has begun examining a further easing of its ultra-loose monetary policy and may decide on such a move this month, the Nikkei newspaper reported, pushing government bond futures to a two-month high.

Finance Minister Naoto Kan told reporters that he would welcome any further BOJ measures to help beat deflation but that he hadn't heard directly from the central bank about what it was considering.

The government, with its fiscal options limited by a ballooning fiscal debt, has been pressuring the BOJ to do more to beat deflation even as most other major central banks mull rolling back stimulus steps put in place during the global crisis.

Another easing move may raise questions about the BOJ's independence after it buckled in December in the face of government pressure and expanded its supply of funds to financial markets.

The BOJ board will debate whether to expand the fund-supply operation it put in place in December, at which the BOJ extends loans to commercial banks at the policy rate of 0.1 percent, the paper said.

March JGB futures rose as high as 140.20 after the report, the highest since December and up 0.19 on the day. [JP/]

The central bank will either boost the amount of funds it supplies in the operation from the current 10 trillion yen (fx conversion) or extend the duration of the loans to six months from the present three months, the Nikkei said without citing sources.

Such a move would be aimed at pushing down longer-term money market rates, such as six-month to one-year borrowing costs, to encourage spending by households and companies.

Lower yen borrowing costs will also help prevent sharp yen rises from hurting exports, a key driving force behind Japan's fragile recovery, the Nikkei said.

But some board members are cautious about loosening policy further with the economy now in relatively good shape, so a decision may be delayed until April, it said.

The finance minister has been escalating pressure on the BOJ, expressing his desire to target inflation and urging the bank to help government efforts to drag the economy out of grinding deflation.

His remarks are likely driven by the need for the Democratic Party-led government to look proactive ahead of an upper house election expected in July, especially since his ratings are dropping due to funding scandals and doubts about his leadership.

The BOJ has said it is committed to fighting deflation but has offered few clues on what it could do in the future beyond keeping interest rates near zero for as long as necessary.

An expansion to the bank's fund-supply operation has been cited by markets as the most likely next option for the BOJ.

The central bank is unlikely to opt for increasing its long-term government bond purchases, a move favoured by some within the government, for fear such a move could be interpreted by markets as monetising debt and trigger sharp bond yield gains, the paper said.

The BOJ's next rate review will be held on March 16-17. It will then meet twice in April. (Editing by Hugh Lawson)