WASHINGTON (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Saturday the central bank will deepen negative interest rates or expand asset purchases if external shocks hit the economy and make the need for further monetary easing “substantial.”

Bank of Japan Governor Haruhiko Kuroda speaks to reporters at the Willard Intercontinental Hotel during the annual meetings of the IMF and World Bank Group in Washington, October 6, 2016. REUTERS/James Lawler Duggan

But Kuroda said he saw no immediate need to top up stimulus with the world’s third-largest economy continuing a moderate recovery.

“The economy moves up and down and at this stage, we don’t think it’s necessary to further reduce” interest rates, Kuroda said at a seminar at Brookings Institution.

“But if there is a big shock and we need to further strengthen our monetary accommodation, we’ll do more,” he said, stressing that the BOJ won’t hesitate to deepen negative rates or expand its already massive asset purchases.

Kuroda said that while the BOJ did not target currency rates in guiding monetary policy, the central bank was monitoring yen moves carefully due to their impact on the economy.

Asked whether it caused problems for the BOJ for the yen to be sought as a safe-haven currency, Kuroda said: “It’s not a serious problem, but a problem from time to time as it could result in excessive (yen) appreciation and disrupt markets.”

Sources have told Reuters the BOJ would deepen negative rates to thwart any sharp spikes in the yen, which it sees as an obstacle to stoking inflation and economic growth.

But analysts doubt how much ammunition the BOJ has left to counter external headwinds with negative rates hurting bank profits by pushing down their already thin margins.

SYNERGY, NOT HELICOPTER MONEY

Kuroda, who spoke after attending the annual International Monetary Fund meetings, said there will be no significant changes in the management of the central bank’s balance sheet under its new framework.

The BOJ last month switched its policy target to interest rates from the pace of money printing, after years of massive asset purchases failed to jolt the economy out of decades of stagnation.

Under a new “yield curve control” (YCC) framework, the BOJ’s main means for easing would be to deepen negative rates from the current minus 0.1 percent, or lower its new 10-year government bond yield target - now set at around zero percent.

Some analysts saw the move as laying the grounds for a future tapering of the BOJ’s huge balance sheet.

Kuroda said while the BOJ will keep buying bonds at the current pace for now, it may reduce the amount “significantly” in the future as long as the yield target can be met.

The BOJ could also reduce the pace of bond buying if 10-year yields fall well below its target, he added.

“Even if the amount of our asset purchases declines or increases, that doesn’t matter as long as we continue to control the yield curve as appropriate,” Kuroda said.

Kuroda played down the likelihood the BOJ would resort to what he called “helicopter money,” where the central bank directly finances government spending by underwriting bonds. But he stressed the benefits of close fiscal and monetary coordination to beat deflation.

“By continuing an extremely accommodative monetary policy, fiscal stimulus could be even more effective because we can avoid interest rate hikes” caused by increased fiscal spending financed by government debt, he said.

“This kind of synergy, or what you can call a policy mix, could be quite useful.”