* Business sentiment key to any BOJ easing - sources
* BOJ to expand asset purchases if it were to ease
* Tokyo also eyes FX intervention, but impact may be limited
* Japan ready to act decisively vs FX if needed -govt
(Adds govt official comments in 3rd, 4th paragraphs)
By Leika Kihara
TOKYO, Aug 21 The Bank of Japan will consider
easing monetary policy further, possibly at an emergency meeting
before next month's rate review, if further rises in the yen
push down Tokyo stock prices enough to hit business sentiment,
The government may also intervene unilaterally again in the
currency market to weaken the yen, although analysts doubt
whether such moves can alter a broad weak dollar trend.
A senior government official expressed Tokyo's readiness to
step into the currency market to stem yen rises if necessary,
saying that recent moves have been speculative.
"Japan's stance is consistent in that it will take decisive
action depending on market developments," the official told
Reuters on Sunday.
The central bank loosened policy just two weeks ago to ease
the pain of persistent yen strength on the export-reliant
economy, and has expressed its readiness to act again if the
prospects of a moderate economic recovery come under threat.
After the yen rose to a fresh record high against the dollar
last Friday, BOJ officials will scrutinise Asian market moves on
Monday and start debating whether the potential harm from recent
yen gains warrants further policy action.
The BOJ's next regular rate review is on Sept. 6-7.
But the chance of it easing its already super-loose policy
before that cannot be ruled out, depending on market
developments, sources familiar with the BOJ's thinking say.
"We will act swiftly, if needed, with an eye on economic
conditions," one of the sources said.
Still, a brief yen spike to fresh records alone would not
trigger immediate BOJ action.
For the BOJ to call an emergency policy meeting, it would
take a sustained yen rise above 76 to the dollar, accompanied by
falls in Tokyo stock prices that are sharp enough to hurt
business confidence, the sources say.
"The BOJ doesn't target currency rates but deals with the
effect of exchange rate moves. The trigger for monetary easing
would be a severe deterioration in sentiment," another source
said. Both sources spoke on condition of anonymity due to the
sensitivity of the matter.
If the BOJ were to ease policy, the most likely option would
be to expand its 50 trillion yen ($656 billion) pool of funds to
buy government and private assets and offer cheap fixed-rate
funds via market operations. The pool was expanded when the BOJ
eased policy earlier this month.
FIRMS FEELING THE PAIN
Tokyo intervened unilaterally in the currency market and
eased monetary policy on Aug. 4. But the steps have not stopped
investors from seeking the yen as a safe haven against risk,
with the dollar hitting a record low of 75.95 yen on Friday. It
later bounced back above 76 yen .
Japanese policymakers have continued to issue verbal
warnings to markets against pushing the yen up too high, and do
not rule out intervening again if they see moves as speculative.
But the effectiveness of any solo intervention would be
limited, with very little chance that Japan's G7 partners would
agree to jointly step into the market to halt a grinding rise in
the yen, analysts say.
Some in the government and the BOJ are cautious about using
their depleted policy options now, given a host of events that
could easily wipe out the impact of any steps they take.
Among them is Federal Reserve Chairman Ben Bernanke's speech
on Aug. 26 at Jackson Hole, Wyoming, where he may signal the
chance of further monetary stimulus, and U.S. payrolls data on
The government, however, cannot afford to stand pat, mainly
for domestic reasons. The dollar is well below the 80 yen level
that many exporters made the basis for their earnings forecasts
for the current financial year to next March.
Many Japanese exporters, who over the years have cut costs
to offset the damage from yen gains, say current yen rises are
beyond what they can take and may shift production overseas.
A strong yen has benefits such as cutting import costs and
making overseas M&A cheaper for Japanese firms. But a yen rise
now is painful for many manufacturers banking on a swift
recovery in the second half of this year, when supply
constraints from the March earthquake and tsunami ease.
Toyota Motor Corp , Japan's biggest car maker, says
every 1 yen rise against the dollar cuts its annual operating
profit by 30 billion yen. Honda Motor Co , the country's
third-biggest auto maker, is studying possible production bases
overseas to replace export-bound car production in Japan.
"Protecting Japanese manufacturing and building cars here is
becoming more and more difficult," Honda Chief Financial Officer
Fumihiko Ike said earlier this month.
The government plans to come up with a package of steps to
ease the pain in a third extra budget, such as offering cheap
loans to small firms hit by the yen's rise.
But progress may be slow as ruling party lawmakers are
manoeuvring to select a successor to unpopular Prime Minister
Naoto Kan, who is expected to step down as early as the end of
With at least seven ruling party lawmakers -- including
Finance Minister Yoshihiko Noda -- eyeing the nation's top job,
the outlook for who will take the helm is unclear, as well as
how the next leader will address the yen's rise.
($1 = 76.245 Japanese Yen)
(Additional reporting by Taiga Uranaka, Linda Sieg and Tokyo
policy team; Editing by Yoko Nishikawa and Edmund Klamann)