By Leika Kihara
AOMORI, Japan (Reuters) - The Bank of Japan stands ready to ease monetary policy pre-emptively to fend off risks that could derail the economy's path toward achieving its 2% inflation target, Deputy Governor Masazumi Wakatabe said on Thursday.
With U.S.-China trade tensions weighing on business sentiment and slowing Chinese demand hurting exports, there is a "significant risk" the BOJ may be forced to alter its current assessment that Japan's economy will keep expanding moderately as a trend, Wakatabe said on Thursday.
"If the economy comes under severe downward pressure and we can say with confidence the momentum for achieving our price target is being lost, the BOJ must ease policy immediately without hesitation," he told a news conference after meeting with business leaders in Aomori, northern Japan.
The BOJ kept policy steady last week but Governor Haruhiko Kuroda signalled readiness to ramp up stimulus as global risks cloud the economic outlook, joining U.S. and European central banks in opening the door to additional easing.
Wakatabe said the U.S.-China trade dispute, if prolonged, would hit the global economy not just through higher tariffs, but by discouraging firms from investing and hurting market sentiment.
A prolonged global downturn would also weigh on currently robust domestic demand, adding to the pain from Japan's scheduled sales tax increase to 10% from 8% in October, he said.
"There's a chance the BOJ will take pre-emptive action if the board can agree that without doing so, it would be difficult to achieve its price target," said Wakatabe, a former academic known as a vocal advocate of aggressive easing.
FACTORS BEHIND FED MOVE KEY
Japan's economy expanded by an annualised 2.1% in the first quarter but many analysts predict growth will slow in coming months as the U.S.-China row wears on.
The bickering over trade policy between the world's first and second biggest economies have put major central bankers in a tough spot, with depleted ammunition to battle a downturn that may be coming sooner than expected.
Despite efforts by the U.S. Federal Reserve to temper market expectations of a big, imminent interest rate cut, investors are pricing in a strong chance of one as early as next month.
Wakatabe said while the BOJ won't ease just because the Fed does, it was important to look carefully at what would drive the U.S. central bank into action.
"We need to give look at how big the risks are to our baseline economic scenario. We also need to think about how the BOJ ought to act, taking into account the reasons behind any Fed action," he said.
Aside from immediate policy actions, the Fed is also discussing ways to update its policy framework.
Wakatabe said Japan could learn from various ideas being proposed in the discussions, such as setting a higher inflation target or targeting average inflation over a number of years.
"At present, it's appropriate to maintain the current policy framework," he said. "That being said, I think it is necessary for the BOJ to study ideas towards enhancing its monetary policy conduct."
(Reporting by Leika Kihara; Editing by David Dolan & Shri Navaratnam)