Exclusive - Bank of Japan's Sato says ready to ease policy again

TOKYO (Reuters) - The Bank of Japan is ready to expand monetary stimulus again even after this month's action and may ponder new steps if necessary, board member Takehiro Sato said, warning of global uncertainties that could push the economy into recession.

In an exclusive interview with Reuters, Sato also said Japan may not achieve the BOJ's 1 percent inflation target as early as the central bank had hoped, issuing the strongest warning to date by a policymaker of risks to the country's recovery.

"We won't hesitate in taking additional monetary easing steps if we feel that risks have heightened enough and that the economy may undershoot our forecasts even after this month's monetary easing," he said on Wednesday.

Sato also warned of uncertainties over the outlook, such as the widening fallout from Europe's prolonged debt crisis, the potential damage to exports from anti-Japan protests in China and a slowdown in Chinese growth that was starting to hurt growth of other economies.

"If these risks materialize, there's a chance Japan may slip into recession," he said, offering the bleakest view on the outlook to date from a BOJ policymaker.

The remarks suggest that the central bank, which eased policy a week ago as weakening global demand hit exports, may consider expanding stimulus again as early as next month if the fragile economy shows signs of slowing further.

They also show that the conservative central bank now has a more aggressive deflation fighter with Sato, a 51-year-old fan of classical music, on deck.

Just two months into the job, the former Morgan Stanley economist appeared unafraid of rocking the boat, saying that the central bank should consider new measures, like buying foreign bonds, if Japan faces serious obstacles in resuming a recovery.

"Buying more risky assets is a possible option," Sato said, although he stressed the central bank should carefully weigh the merits and costs in considering such measures.

FOREIGN BOND BUYING AN OPTION

With interest rates virtually at zero, the BOJ has been using as its key monetary easing tool an asset-buying programme under which it buys government bonds, corporate debt and trust funds investing in stocks and property - but not foreign bonds.

Aside from buying more risky assets and longer-dated government bonds under the programme, the central bank could consider purchasing other risky assets such as foreign bonds in the long run, Sato said.

Faced with pressure for bolder action, the BOJ set a 1 percent inflation target and boosted asset purchases in February, and followed up with another easing in April.

It eased policy again last week with BOJ Governor Masaaki Shirakawa warning that Japan's economic recovery will be delayed by around six months due to weakening exports.

Many analysts expect the BOJ to cut its economic and price forecasts when it issues a twice-yearly outlook report at its policy-setting meeting on October 30.

Sato said the weaker-than-expected economic growth meant that it has now become more uncertain whether Japan will see 1 percent consumer inflation sometime around the fiscal year beginning in April 2014, as the BOJ projects.

He also said strength in domestic demand, which has partially offset the weakness in exports, is beginning to fade as the global slowdown dampens corporate spending plans.

HSBC Securities expects the BOJ to expand asset purchases by another 5 trillion yen ($64 billion) before the year-end as the economy is expected to stall further in late 2012.

Sato caused a stir when he said at his inaugural news conference that the BOJ could consider buying foreign bonds, which would be a departure from the bank's long-held stance that it is prohibited to do so under current law.

In the interview, he reiterated that buying foreign bonds would be a viable option because if the yen weakens as a result, that would help boost exports and improve market sentiment.

Some politicians have supported this idea, but many analysts say it is unlikely to make much headway because current law prohibits the BOJ from buying foreign assets, which infringes on the finance ministry's jurisdiction on exchange-rate policy.

Sato said that if legal limits make it difficult for the BOJ to buy foreign bonds, the finance ministry could do so instead as that would have the same effect of intervening in the currency market to step sharp rises in the yen.

What is important is for policymakers to work together to counter a strong yen that hurts the export-reliant economy, he said.

"The IMF has said the yen is moderately over-valued. The fact that the IMF would make such an assessment is a remarkable event, showing there's a chance that the perception of the yen in the international community is changing," he said.

"This is a tail wind for our country's currency policy. The BOJ and the government should work together to seize this opportunity and show markets that they will work to correct the over-valued yen. This would be a very constructive message to send to financial markets."

Japan has been mired in grinding deflation for much of the past decade as the weak economy prevents companies from passing on the rising costs to consumers.

The BOJ expects core consumer prices, which excludes volatile fresh food prices, to rise 0.2 percent this fiscal year and 0.7 percent the following year. But many analysts see that forecast as too optimistic given core consumer prices fell 0.3 percent in July to mark the third straight month of declines.

Political pressure for bolder action to beat deflation is expected to heighten after Japan's main opposition party on Wednesday picked former prime minister Shinzo Abe, an advocate of aggressive monetary easing, as its new leader, giving him another shot at the premiership.

($1 = 77.8800 Japanese yen)

(Additional reporting by Sumio Ito, Stanley White and Yoshifumi Takemoto; Editing by Kim Coghill)

(leika.kihara@thomsonreuters.com; +813-6441-1828; Reuters Messaging: leika.kihara.reuters.com@reuters.net)

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