September 19, 2018 / 3:07 AM / in a month

UPDATE 1-BOJ holds policy, sticks to modest economic growth view despite trade perils

* BOJ keeps interest rate targets unchanged

* Board maintains forward guidance to keep rates low

* Japan’s economy expanding moderately - BOJ

* Governor Kuroda to brief media 0630 GMT (Recasts with policy decision)

By Leika Kihara and Stanley White

TOKYO, Sept 19 (Reuters) - The Bank of Japan kept monetary policy steady on Wednesday and maintained its view the economy will continue to expand modestly, even as escalating global trade frictions threaten to chill growth.

The central bank’s nine-member board also likely scrutinised bond market moves since its decision in July to allow yields to move more flexibly around its zero percent target.

Investors are focusing on BOJ Governor Haruhiko Kuroda’s post-meeting briefing for clues on the debate over market moves, as well as any warnings he may issue on the damage the intensifying trade war between the United States and China could inflict on Japan’s export-reliant economy.

As widely expected, the BOJ maintained its short-term interest rate target at minus 0.1 percent and that for long-term rates around zero percent by a 7-2 vote.

It also stuck to a pledge, put in place in July, to keep rates very low for an extended period as inflation remains far off its 2 percent goal.

“Japan’s economy is expanding moderately,” the BOJ said in a statement announcing the policy decision, adding that solid global demand was underpinning exports.

The meeting came ahead of a ruling party leadership race on Thursday, which Prime Minister Shinzo Abe looks set to win and put him on track to become Japan’s longest-serving premier.

While few analysts expect the BOJ to immediately dial back stimulus, politicians have sent signals that they are becoming more amenable to the idea of a future exit from easy policy.

Abe said last week the BOJ’s ultra-easy policy should not last forever, signalling his hope of laying the path toward an exit from a radical stimulus programme.

Markets are focusing on how Kuroda could respond to Abe’s remarks, as well as clues on whether the BOJ may act again to boost trading activity.

Years of heavy money printing and ultra-low rates have dried up bond market liquidity and strained bank profits, inflaming concerns even within the BOJ over the rising cost of the central bank’s massive stimulus programme.

Despite the BOJ’s steps in July to make its policy framework more flexible and sustainable, long-term yields have been caught in a narrow band around 0.1 percent, underscoring the difficulty of chasing two goals - sticking to a policy that aims to cap bond yields while attempting to boost trading activity. (Additional reporting by Tetsushi Kajimoto and Kaori Kaneko Editing by Shri Navaratnam)

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