TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the central bank was ready to act “without hesitation” if market volatility blamed on the coronavirus outbreak undermines the economy, signalling his readiness to expand stimulus as early as next week.

FILE PHOTO: Bank of Japan Governor Haruhiko Kuroda speaks at a news conference in Tokyo, Japan, January 21, 2020. REUTERS/Kim Kyung-Hoon/File Photo

The yen’s spike to three-year lows and sharp falls in Tokyo stock prices on Monday added pressure on the BOJ to top up support for an economy hit by event cancellations, travel restrictions and cooling consumption related to the epidemic.

“Uncertainty over Japan’s economic outlook is heightening. Investor sentiment is deteriorating somewhat, with market moves unstable,” Kuroda told parliament on Monday.

“We’ll take appropriate action without hesitation as needed with an eye on the impact of the spread of the coronavirus, particularly through domestic and overseas market moves.”

The remarks suggest market developments and their impact on corporate sentiment will be key to what steps the BOJ will take at its policy-setting meeting on March 18-19.

“Monetary policy cannot contain the virus. But it can help prevent a sharp deterioration in business sentiment,” a source familiar with the BOJ’s thinking said.

“The BOJ has various tools at its disposal under its current framework,” another source said, adding the central bank will likely scrutinise developments until the last minute in making the call on what steps to take.

DWINDLING POLICY AMMUNITION

Japan’s economy shrank more than initially estimated in the fourth quarter, and the impact of the coronavirus outbreak is increasing the risk of a recession.

Adding to woes for the export-reliant economy, the yen .JPY jumped more than 3% against the dollar. Tokyo's Nikkei average .N225 hit 14-month lows as virus fears and collapsing oil prices fed a heavy sell-off.

Sources have told Reuters the BOJ may take steps to ensure firms hit by the outbreak do not face a financial squeeze before the March end of the fiscal year.

While the recent market volatility has heightened the chance the BOJ will take bolder monetary easing steps next week, there is uncertainty on what measures it could take.

Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield at around zero. It also buys risky assets such as exchange-traded funds (ETF) to funnel money to the economy.

Kuroda said that for now, the BOJ will act in line with guidance laid out in an emergency statement issued on March 2.

The statement said the BOJ will offer ample liquidity via market operations and asset purchases, suggesting it would make full use of existing tools before easing further.

Since then, the BOJ has been accelerating the pace of ETF buying. It bought 100.2 billion yen ($979 million) on Monday, matching a record pace of purchases made twice last week.

The BOJ could tweak its pledge to buy ETFs at an annual pace of roughly 6 trillion yen if it approaches the ceiling as a result of aggressive purchases, a third source said.

Deepening negative rates is another possible option, though many BOJ officials are wary of doing so as it could backfire by hurting commercial banks and discouraging them from lending.

The decision is likely to be a close call given the dwindling policy ammunition the BOJ has left and the rising cost of prolonged easing, the sources say.