Bank of Japan Governor Masaaki Shirakawa said on Monday he was continuing to monitor the risk that Europe's debt woes could affect Japan's banking system, just as renewed fears about the euro zone spooked financial markets.

Japan's financial system has maintained stability as a whole, but close watch is still needed on risk factors such as a spillover from Europe's situation, Shirakawa said at a gathering of trust banks.

The euro slumped broadly on Monday as soaring bond yields in Spain rekindled worries about the fragile state of the euro zone economy, while broad risk-averse sentiment lifted the yen to a seven-week high against the dollar.

Shirakawa maintained the view, however, that the risk of major turmoil in global financial markets has subsided, thanks to massive fund supplies by the European Central Bank and Greece's rescue program.

He also stuck to the central bank's projection of a moderate recovery for Japan's economy and indicated the bank will maintain a ultra-loose policy bias to help pull Japan out of deflation following the BOJ's surprise February easing.

In February, we clarified our policy bias and boosted monetary easing. As such, the BOJ is making its utmost efforts to escape deflation, Shirakawa said in a speech at an event hosted by the Trust Companies Association of Japan.

The BOJ surprised markets in February by boosting its target for asset purchases by double the usual increment and setting a 1 percent inflation goal, signaling a more aggressive policy to beat deflation, which has plagued the economy for nearly two decades.

The central bank has kept monetary policy steady since then but will consider easing at its next rate review on April 27 by boosting asset purchases, sources say.

(Reporting by Rie Ishiguro; Editing by Chris Gallagher and Richard Borsuk)

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