By Leika Kihara
Asahikawa, JAPAN (Reuters) - The Bank of Japan expects bond yields to stabilize over time with its flexible market operations and massive asset purchases, a central bank policymaker said, signaling that it has no immediate plans to take fresh steps to calm volatile markets.
Sayuri Shirai, a former IMF economist who is among the BOJ's nine board members, said it was natural and desirable for bond yields to gradually rise in the next two to three years on prospects of an economic recovery and rising prices.
She also said the central bank already has sufficient tools in place to deal with the market volatility, suggesting that she saw no need to extend the maximum duration of funds the BOJ offers in market operations from the current one year - an idea that was debated but not approved at a rate review on Tuesday.
"The BOJ will continue to closely monitor market developments. With flexible market operations, taking into account discussions with market participants, the BOJ expects both short and long-term interest rates to move stably as a whole," she told business leaders in Asahikawa, northern Japan.
The BOJ kept monetary policy steady on Tuesday and held off on new measures to quell bond market turbulence, judging that its massive monetary stimulus in April was sufficient to revive the stagnant economy and pull it out of chronic deflation.
The decision contributed to a sharp sell-off in global equities, including Japanese shares, as the prospect of less stimulus from central banks - particularly from the U.S. Federal Reserve - depressed sentiment.
Shirai sounded unfazed by the yen's rebound and sharp falls in Japanese equities on Thursday, saying that while the BOJ will keep an eye on market moves, the effect of its massive asset purchases will heighten over time.
"It's true volatility is heightening in the stock market ... and I hope stock prices will stabilize," Shirai told a news conference after meeting business leaders.
"We'll proceed with the monetary easing steps already decided, which should offer support (to the economy)."
The dollar fell more than 2 percent to below 94 yen on Thursday, giving up most of its gains after the BOJ's aggressive monetary easing campaign announced on April 4, on uncertainty over when the U.S. Federal Reserve will taper its bond-buying program.
The Nikkei share average also dived more than 6 percent, wiping out gains since the BOJ's April easing, a potentially unwelcome development for Prime Minister Shinzo Abe's bold monetary and fiscal stimulus that relies heavily on boosting consumer sentiment to revive the world's third-biggest economy.
ECONOMIC RECOVERY INTACT
Japan's economy grew an annualized 4.1 percent in the first quarter thanks to Abe's bold stimulus policies and the weak yen, which boosts the competitive advantage of the country's goods.
The recent market volatility may cloud Japan's growth prospects, although Shirai stuck to the BOJ's view that the economy will resume a moderate recovery around mid-year.
Expectations of future price rises and an economic recovery will work to push up bond yields, although the BOJ's huge bond buying and its strong commitment to ultra-easy policy will offset some of the upward pressure, she said.
On prices, Shirai warned that it will take considerable time to achieve the BOJ's 2 percent inflation target in a country mired in deflation for 15 years.
"As for prices, I personally feel we need to focus somewhat more on downside risks," she said, adding that an expected sales tax hike next year may hurt household spending and discourage companies from passing on the rising costs to consumers.
The BOJ launched an intense burst of monetary stimulus in April, pledging to double its bond holdings in two years to meet its inflation goal in roughly two years.
(Additional reporting by Kaori Kaneko; Editing by Shinichi Saoshiro & Kim Coghill)