UPDATE 2-BOJ head: Expanding asset buying an option-Nikkei

* Japan economy to recover next fiscal year: Shirakawa

* Adds Japan bond yield rise due to U.S. yield gains

* Cautious of U.S., European economic outlook

(Adds more quotes, background)

(For more stories on the Japanese economy, click

By Leika Kihara

TOKYO, Dec 11 (BestGrowthStock) – Bank of Japan Governor Masaaki
Shirakawa said the central bank may look into further monetary
easing by expanding its new asset buying fund if the economy
deviated sharply from its forecast

For now, the Japanese economy was moving in line with the
central bank’s forecast that it will pull out of a lull in the
business year starting next April, Shirakawa said in an
interview with the Nikkei business daily that ran on Saturday.

“The slowing pace of improvements may last for a while,
but the economy will return to a path of gradual recovery
starting next fiscal year,” Shirakawa said.

The BOJ eased policy in October by pledging to keep
interest rates effectively at zero until the end of deflation
was in sight and by crafting a 5 trillion yen ($600 million)
pool of funds to buy assets ranging from government bonds to
corporate debt.

Shirakawa said the measures helped turn around corporate
fundraising environment by pushing down interbank lending
rates and narrowing the spread between corporate bonds and
Japanese government bonds.

“Japanese long-term interest rates are rising somewhat.
But the rise in U.S. long-term rates, which came as excessive
pessimism about the U.S. economy subsided, has been behind the
move,” Shirakawa said.

“Our comprehensive monetary easing steps have just begun.
It generally takes one-and-a-half to two years for the effect
to spread to the economy,” he said.

Shirakawa expressed concerns about the European and the
U.S. economy, saying that the BOJ will remain consistently
cautious of the outlook, the paper reported.

Japanese government bond yields rose to multi-month highs
this week, posing a headache for the BOJ who had hoped to push
down the short end of the yield curve with its asset purchases.

Some market players have called on the BOJ to increase its
bond purchases to push down yields, although the central bank
is hesitant to do so too soon. [ID:nTOE6B904N]

BOJ policymakers have repeatedly said that increasing the
size of the asset buying fund would be a clear option if the
looming economic slowdown proves worse than expected.
(Additional reporting by Saqib Iqbal Ahmed in Bangalore;
Editing by Sanjeev Miglani)

($1=8393 Yen)

UPDATE 2-BOJ head: Expanding asset buying an option-Nikkei