UPDATE 1-BOJ leaning toward easing as yen rises, Europe crisis looms

* Policy rate seen on hold at 0-0.1 pct

* BOJ may ease by an increase in asset buying

* BOJ decision expected 0330-0530 GMT

* BOJ to cut growth forecasts, warn of risks

* Finmin Azumi threatens fx action vs speculative yen rise

By Leika Kihara

TOKYO, Oct 27 (Reuters) – The Bank of Japan is leaning
toward easing monetary policy further at a meeting on Thursday
as the yen’s recent ascent to record highs and uncertainty on
whether Europe can map out details on tackling its debt crisis
cloud the outlook.

If the central bank acts, it will likely expand its 50
trillion yen ($658 billion) asset-buying programme by around 5
or 10 trillion yen, sources familiar with the bank’s thinking
have said.

The yen slid and U.S. stocks rallied on Wednesday on news
that euro zone leaders plan to boost the power of the region’s
bailout fund, offering some relief to Japanese central bankers
gathering for the one-day rate review.

But with market jitters over Europe’s debt crisis likely to
persist, the central bank will be under pressure to take action
to ease the pressure on Japan’s economy, which is just
recovering from the devastating March earthquake and tsunami.

Finance Minister Jun Azumi repeated his warning that Tokyo is
ready to take decisive action against speculative yen rises, and
expressed hope that the BOJ will work with the government to
support the economy.

“We stand ready to take firm measures on currencies if
necessary. I want to monitor moves during trading in Tokyo
today,” Azumi told reporters on Thursday.

“(BOJ Governor Masaaki) Shirakawa must be fully aware of the
current situation and I trust him. I expect discussions (at the
board meeting) to be very positive. We want to work together
with the BOJ to overcome the current situation,” Azumi said.

The remark suggests the government’s strong desire for
the BOJ to act and heightens chances the central bank will
likely respond with an immediate easing of monetary policy.

The yen stood at 76.20 yen to the dollar in early
Tokyo trade, only slightly off the record high of 75.709 set on
Wednesday, keeping alive the threat of intervention by Japanese
authorities, who have repeatedly warned markets against pushing
up the currency further.

But analysts doubt if Tokyo is ready to sell huge enough
amounts of yen to turn the tide.

“Japan isn’t that willing to conduct intervention because of
agreements with the G7,” said Junya Tanase, chief strategist at
JPMorgan Chase in Tokyo.

Japan’s economy is recovering from the March earthquake and
the BOJ has been counting on fiscal spending on reconstruction
and demand from emerging markets to sustain the upturn.

RISKS HEIGHTENING

Many central bankers have been hoping to save their limited
policy options for later, the sources have told Reuters, but in
light of the latest market worries they may not be able to do
so.

Shirakawa said on Wednesday that the bank was already buying
massive amounts of government bonds to keep monetary conditions
ultra-easy, countering views it was not doing enough to support
the economy.

But some on the board have been more pessimistic about the
outlook, given growing signs that Europe’s debt crisis is
starting to hurt emerging Asia — Japan’s key export market.

The pessimists may get their way given the yen’s renewed rise
to record highs since last week and doubts that European leaders
will calm markets with a plan to rein in the region’s debt
crisis in time to avoid a global credit crunch.

The BOJ will also issue a twice yearly outlook report in
which it is expected to cut its economic forecasts on slowing
global growth and to project that core consumer inflation will
be stuck near zero until early 2014.

While the central bank is expected to stick to its view that
Japan’s economy is headed toward a moderate recovery, it will
stress heightening risks from abroad and from market moves –
notably the strong yen.

The BOJ last eased policy by boosting its asset buying pool
in August, acting in tandem with the Finance Ministry, which
ordered Japan’s biggest-ever single-day currency intervention,
selling more than 4.5 trillion yen.

The impact proved short-lived, however, and the yen crawled
back to trade close to its record highs.

This has been a source of deepening frustration for Japanese
officials, who argue that a yen rally is one problem too many
for a nation grappling with a nuclear crisis, a $250 billion
post-quake rebuilding effort and ballooning debt.

Since September 2010, Japan has intervened twice on its own
and once jointly with other G7 rich nations to weaken the yen.
But the effects of intervention have proved fleeting in the face
of steady demand from nervous investors seeking highly liquid
and relatively safe assets such as Japanese government bonds.