BOJ seen defying easing calls as political pressure heats up
* Outcome expected around 0330-0530 GMT
* Likely next PM calls for bolder central bank action
* Markets to see how BOJ responds to independence concerns
* Comments from governor's briefing seen after 0715 GMT
* Markets betting on Dec easing, BOJ weighing options
By Leika Kihara
TOKYO, Nov 20 (Reuters) - The Bank of Japan is expected to stand its ground by keeping monetary policy unchanged on Tuesday in the face of calls from the country's likely next prime minister to pursue "unlimited" easing.
The leader of the main opposition, Shinzo Abe, has put the central bank at the centre of economic debate ahead of a Dec. 16 national election that surveys show his party would win, signalling his government would put the bank under much greater pressure to ease policy.
Abe has even suggested revising the Bank of Japan law, a step critics say is aimed at clipping the central bank's independence and forcing it to print money to finance public debt that is already double the size of Japan's economy.
However, economists expect the central bank to keep monetary policy steady on Tuesday, having eased in September and October. It will prefer to hold fire so it can size up the government to be formed after the Dec. 16 vote for the powerful Lower House.
Markets will also look to see how BOJ Governor Masaaki Shirakawa responds to the increased political heat when he addresses a media briefing following the policy meeting.
"The BOJ will stand pat this month and probably ease in December by boosting bond purchases by 10 trillion yen ($123 billion)," said Izuru Kato, chief economist at Totan Research.
"Even so, it will remain under pressure for more action."
Japan's economy shrank 0.9 percent in the September quarter and given headwinds to growth in the current quarter, is widely expected to have slipped into a recession. The BOJ may reflect that by cutting its assessment of the economy and thus signal a readiness to loosen policy as early as next month.
Abe, the leader of the Liberal Democratic Party (LDP), has called on the BOJ for bolder policy action, including "unlimited easing", pushing interest rates to zero or below zero and directly underwriting bonds issued to fund public works spending.
The comments pushed the yen to a near seven-month low against the dollar and raised expectations the BOJ may act at its next rate review on Dec. 19-20, just after the election.
The BOJ is unlikely to give in to some of the extreme demands, such as underwriting debt, but is weighing options beyond its asset-buying and lending programme, its main policy tool, having cut policy rates effectively to zero, sources say.
For now, though, many central bankers prefer to hold fire to scrutinise the impact of easing in September and October, which brought the size of the asset buying and lending programme to 91 trillion yen -- roughly equal to Japan's annual state spending.
Shirakawa has warned that flooding markets with cash alone will not push up prices when interest rates are already near zero. Japan has been dogged with deflation for years despite the BOJ's ultra-easy policy.
The BOJ set a 1 percent inflation target in February and has eased policy four times so far this year. Abe has talked of setting an inflation target of 2 percent or 3 percent.
Despite the political pressure, the BOJ is caught in a dilemma. Bank notes in circulation are rising and the balance of deposits that commercial banks park with the BOJ is at a record high of 44 trillion yen as a result of its ultra-loose policy.
But bank lending rose a meagre 0.9 percent in the year to October, a sign the extra cash has not prompted companies and households to borrow more for new spending.
Under the current law, the BOJ is free to set monetary policy. But the government nominates the governor, deputy governors and board members, which need parliament approval, giving it power to sway the direction of policy.
Government pressure has frequently driven the central bank into easing policy, particularly when a rise in the yen raised calls for measures to ease the impact of the stronger currency on the export-reliant economy.
While Abe's remarks have helped lift Tokyo share prices on expectations of bolder monetary stimulus, some analysts say his demands are unrealistic and they doubt whether he will stick to them once in power.
Many economists also warn that threatening central bank independence or forcing it to underwrite public debt could trigger an unwelcome spike in bond yields by raising doubts in markets about Japan's ability to keep its fiscal house in order.