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Bank of Japan Governor Haruhiko Kuroda warned of heightening risks to the economic outlook and signalled the central bank’s readiness to ramp up stimulus if needed, brushing aside concerns it lacks policy ammunition to stave off another recession.

In a widely expected decision, the BOJ maintained its massive stimulus program on Thursday and stuck to its view the world’s third-largest economy continues to expand moderately.

But Kuroda cautioned of growing risks to Japan’s economy due to Sino-U.S. trade tensions and volatile markets, suggesting the central bank’s next move could be to ramp up - not whittle down - stimulus.

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“There are more downside risks to Japan’s economy, particularly via overseas economic developments,” Kuroda told a news conference.

“If we think doing so would be necessary to sustain the momentum for achieving our price target, we will ease monetary policy further as appropriate.”

Despite a common market view the BOJ’s policy ammunition is running low, Kuroda said the central bank has room to ease further including by cutting interest rates, ramping up asset buying and accelerating the pace of money printing.

“It’s true we need to be vigilant to various risks, including from overseas. But there’s no change to our baseline view on Japan’s economy and its outlook,” he said. “If necessary, we have means available to ease policy further.”

Japan’s economic growth contracted in July-September and analysts expect only a modest rebound in coming quarters on darkening prospects for exports, adding to challenges for the BOJ to achieve its elusive 2 percent inflation target.

Asian shares slid on Thursday after the U.S. Federal Reserve raised rates and kept most of its guidance for additional hikes over the next two years, rattling investors who had expected a more dovish policy outlook.

Tokyo’s Nikkei share average tumbled 2.8 percent to close at its lowest since September 2017, while the dollar hit a 7-1/2-week low against the yen. A strong yen is considered negative for Japan’s export-reliant economy as it erodes the competitive advantage of its goods sold overseas.

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Japan’s top currency diplomat Masatsugu Asakawa warned on Thursday that investors were “over-reacting” to recent weak economic data, signalling his displeasure over heightening financial market volatility.

YIELD FALLS NATURAL

As expected, the BOJ kept its short-term rate target at minus 0.1 percent and the 10-year yield target around zero percent under a policy dubbed yield curve control (YCC).

The BOJ is in a dilemma. Years of heavy money printing has left it with little ammunition to battle another recession, and the global economic slowdown is depriving the central bank of any near-term chance to restock its tool-kit.

Even maintaining the current stimulus is proving costly as ultra-low rates strain regional banks’ profits and its huge purchases dry up bond market liquidity.

“The BOJ is being caught between the need to address the side-effects of its stimulus, and prospects of a global slowdown and trade war,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

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“The BOJ may be forced into further easing in 2020 as Chinese and U.S. economies slow more, which would hurt Japan’s exports and capital expenditure.”

The central bank tweaked its policy framework in July to make it more sustainable, including by allowing greater flexibility for bond yields to move around its zero percent target.

The move was partly intended to allow for a natural rise in long-term rates, so financial institutions could reap profits from a steepening yield curve.

But Japanese long-term rates have traced U.S. Treasury yields lower reflecting investors’ risk-averse stance. The yield on the 10-year Japanese government bond fell to 0.010 percent on Wednesday, its lowest since September last year.

Kuroda said he saw no major problems with recent declines in Japanese long-term rates, emphasising they were a natural reflection of falling global yields.

“Even if 10-year yields fall below zero, it won’t be a problem as long as they move within the range we said we will tolerate,” he said.

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Analysts say there is little chance of the BOJ withdrawing stimulus any time soon given the worsening global economic outlook, meaning it will lag well behind the Fed in dialling back crisis-mode policies.

“China’s economy is growing slower than widely believed and this will continue during the first half of next year. Many people believe the U.S. economy has peaked out,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management Co.

“This greatly reduces the possibility of the BOJ changing policy in the first half of next year.”

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