BOJ sees deflation easing but keeps easy policy bias

Japan is expected to make progress in beating deflation but risks to its economy remain, a senior Bank of Japan official said, stressing that the central bank is sticking to its ultra-easy policy bias.

BOJ Deputy Governor Hirohide Yamaguchi said annual growth in Japan's core consumer prices, the BOJ's key price gauge, has returned close to zero percent after remaining negative for most of the past decade, and is likely to turn positive.

But there are uncertainties that pose risks to the economy, such as the recent spike in commodity prices as well as the outlook for the U.S. and European economies, Yamaguchi told parliament on Monday.

The BOJ will take appropriate action if economic and price conditions worsen, he said, signaling that the central bank stands ready to ease policy further if growth sharply undershoots its forecasts.

Inflation fears stemming from the spike in commodity prices have nudged several Asian central banks to raise interest rates. European Central Bank policymakers have also talked tough on inflation, reinforcing expectations that they will raise interest rates next month.

But the BOJ is sticking to its ultra-easy policy bias as it feels soaring commodity costs will only gradually work their way through the broader economy, due to weak domestic demand.

Inflation is a far less imminent concern for Japan, which is still mired in grinding deflation, although the rise in commodity prices is seen pushing up consumer inflation in coming months.

The BOJ last year cut interest rates effectively to zero and set up a 5 trillion yen ($61 billion) pool of funds to buy assets ranging from government bonds to private debt, aiming to support the fragile economy and pull Japan out of deflation.

BOJ officials have said that topping up the asset buying plan is a clear option if downside risks to growth materialize, although expectations of an imminent monetary easing have diminished on growing signs that Japan's economy will soon emerge from a lull.

(Additional reporting by Rie Ishiguro; Editing by Edmund Klamann)