KUMAMOTO, Japan Bank of Japan board member Sayuri Shirai warned of looming risks to the economic outlook that could keep price growth lower than the central bank's forecasts, keeping alive market expectations of further monetary loosening as early as next month.
Shirai, a former IMF economist, repeated the BOJ's view that consumer inflation will steadily approach the central bank's target of 1 percent in the year ending in March 2015.
But she said the risk balance for price growth was "tilted to the downside," warning that the widening pain from Europe's debt woes, slowing Chinese growth and the looming U.S. fiscal cliff may delay Japan's progress in overcoming deflation.
"While both upside and downside risks to the economy exist, I personally see the downside risks as greater," Shirai told business leaders in Kumamoto, southern Japan, on Thursday.
The risks have not heightened beyond what the BOJ projected in its twice-yearly outlook report issued last month, although vigilance was needed on whether they could materialise and further hurt the world's third-largest economy, she said.
"Capital expenditure and private consumption are among key risks I'd like to look out for," she told a news conference after the meeting, pointing to signs that some companies were starting to delay investment due to weakening sales overseas.
Aside from overseas risks, Japan's economic outlook is also clouded by an expected sales tax hike in 2014 that could dampen consumer spending, Shirai said.
Japan's economy shrank 0.9 percent in the quarter to September and analysts expect another contraction in the final three months of this year, a sign that weak exports and output were nudging the economy into recession.
The BOJ eased policy for two straight months in October to ease the pain from weakening global demand, and many market players expect it to expand stimulus again as early as its next policy-setting meeting on December 19-20 in the face of heightening political pressure for bolder action to beat deflation.
Main opposition party leader Shinzo Abe, seen as the likely next premier after a general election on December 16 that polls suggest his party will win, has called for bolder BOJ action such as "unlimited" easing and a possible revision to a law guaranteeing its independence to give the government more say in monetary policy.
Shirai said that while the central bank shared the view held by some politicians that Japan's economy is in a severe state, its independence must be respected.
She also dismissed the need to strengthen the BOJ's language pledging to keep ultra-easy policy in place until 1 percent inflation comes into sight, an idea proposed last month by board member Takehiko Sato but turned down by a 2-7 vote.
"What's important is that the BOJ will continue its powerful monetary easing as long as achieving 1 percent inflation in 2014 cannot be foreseen," she said. "We made that commitment and there's no change to it," Shirai said.
In its latest forecasts issued on October 30, the central bank expects core consumer prices to fall 0.1 percent in the year ending in March 2013, but rise 0.4 percent in the next year and 0.8 percent in the year to March 2015.
The BOJ set a 1 percent inflation target in February and has eased monetary policy four times so far this year to beat deflation and revive an export-reliant economy hurt by a strong yen and weakening global demand.
But core consumer prices fell 0.1 percent in the year to September, marking the fifth straight month of declines. Data due out on Friday is expected to show they posted flat growth in October, according to analysts polled by Reuters.
Shirai is regarded as among those in the nine-member board who are more pessimistic about the economy and more eager to loosen policy pre-emptively to forestall risks to the outlook.
(This version of the story corrects timing in first paragraph to next month.)
(Reporting by Leika Kihara; Editing by Michael Watson & Kim Coghill)