NIIGATA, Japan The Bank of Japan will take decisive action to support the economy if risks to the outlook heightens, its deputy governor said, offering the strongest signal to date from a policymaker of the bank's readiness to ease policy again this month.
Deputy Governor Kiyohiko Nishimura also strengthened the central bank's commitment to ultra-easy policy, saying that it will keep its asset-buying program in place even after the end-2013 deadline for purchases if 1 percent inflation is not foreseen by then.
"The BOJ has been and will always be ready to take appropriate and decisive action when the economy deviates from our baseline scenario, or when risks to our scenario materialize," Nishimura told business leaders in the northwestern city of Niigata on Wednesday.
He warned that the central bank was focusing on downside risks to the economy, suggesting that it may expand monetary stimulus further soon to keep the fragile economy afloat.
"We need to be particularly mindful of the possibility that a prolonged slowdown in overseas growth may delay a recovery in exports and output, exacerbating the negative effect on domestic demand," Nishimura said.
The BOJ has been under intense political pressure to take bolder action to beat deflation that has plagued Japan for more than a decade.
Shinzo Abe, the head of a main opposition party which looks set to win a December 16 general election, has called for "unlimited" easing to achieve 2 percent inflation and a possible revision to a law guaranteeing the BOJ's independence.
Many market players have thus expected the BOJ to ease again at its next policy meeting on December 19-20, to be held just days after the election, or in January.
Nishimura's remarks, which echo the pessimistic views of BOJ board member Sayuri Shirai last week, suggest the BOJ may not wait until next year in expanding monetary easing further.
"Hard data for October were tilted less to the downside, but that does not mean downside risks have disappeared, so there is a good rational for the BOJ to ease this month," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.
"I don't think the BOJ will take the more radical measures that some people are arguing for. They're likely to go for a steady increase in asset purchases, maybe even beyond 2013."
The BOJ set a 1 percent inflation target in February and eased four times this year in an effort to revive the economy and show its determination to beat deflation.
But the economy shrank 0.9 percent in the September quarter and is expected to contract again this quarter, meeting the popular definition of a recession, as the country deals with the global headwinds of debt-ridden Europe and a sluggish U.S. economy.
Japanese factory output unexpectedly rose in October in a rare positive sign, but recent remarks by policymakers suggest the central bank remains wary of looming risks to the outlook that could threaten the country's recovery prospects.
The BOJ may thus debate easing policy further this month, say sources familiar with its thinking, particularly given the intense political pressure for more aggressive stimulus.
With interest rates virtually at zero, the central bank put in place in 2010 an asset-buying and loan program as its key monetary easing tool. It has repeatedly topped up the program, now pledging to pump 91 trillion yen ($1 trillion) via asset buying and market operations.
A former academic and among the BOJ's two deputy governors, Nishimura surprised markets by proposing an expansion in asset purchases last year. His proposal was not accepted by the board at that time. He has voted with the majority since then.
($1 = 81.8150 Japanese yen)
(Additional reporting by Stanley White; Editing by Michael Watson & Kim Coghill)