* Merits of easing outweigh the costs - Wakatabe
* Adds BOJ should ramp up stimulus if price goal not met
* Premature exit could pull Japan back to deflation - Wakatabe
* Amamiya says BOJ has necessary tools for an exit (Adds Amamiya quotes)
TOKYO, March 5 (Reuters) - The Bank of Japan must avoid a premature exit from its ultra easy policy and consider ramping up stimulus if needed to pull the economy out of deflation, Masazumi Wakatabe, one of the two nominees for BOJ deputy governor, said on Monday.
Wakatabe, an academic known as a vocal advocate of aggressive easing, said the merits of the BOJ's stimulus programme "far exceeded" the costs, brushing aside criticism from some analysts that prolonged monetary easing was straining Japan's banking system.
Central bank governor Haruhiko Kuroda on Friday rattled markets by flagging for the first time the prospect of an exit from accommodative policy if his inflation target was met, sending the yen higher and bond prices lower.
While Wakatabe's remarks on Monday were markedly more dovish than those of his boss, economists say they are more measured than some of his earlier ideas about policy, which argued for the need for more aggressive easing.
"What's most important is to make a full exit from deflation. The BOJ's 2 percent inflation target is effective and meaningful for this purpose," Wakatabe said in a confirmation hearing in the lower house of parliament.
"Prematurely shifting the BOJ's easy policy could pull Japan back to deflation," he said, adding that the BOJ must be ready to ramp up stimulus if doing so is needed to hit its price goal.
Both Wakatabe and career central banker Masayoshi Amamiya appeared before parliament, having been nominated by the government to become deputy BOJ governors, when the posts become vacant on March 20. The government reappointed Kuroda to serve another five-year term when the current one ends on April 8 and parliament is expected to approve both Wakatabe's and Amamiya's nominations.
Wakatabe told lawmakers there were "no limits" to what monetary policy can do to stimulate the economy, and was open to the idea of raising the BOJ's inflation target if doing so could help change public perceptions that deflation will persist.
But he held off from proposing some of the more radical ideas he had floated as an academic, such as accelerating the pace of the BOJ's bond buying or bankrolling government debt.
"Wakatabe is known as an advocate of additional easing. He tends to sound dovish, but in parliament his comments sounded a little more cautious than the statements he has made as an academic," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Wakatabe, however, could propose expanding stimulus if the BOJ slashes its inflation forecasts in a quarterly review of its projections next month, Miyazaki said.
In contrast, Amamiya, the other deputy nominee who has served as Kuroda's right-hand man as the BOJ's executive director overseeing monetary policy, mostly echoed the governor's views on monetary policy - a sign the two will continue to work hand in hand on key policy decisions.
Elaborating on what the BOJ's exit strategy could look like, he said the bank had the necessary tools to engineer a smooth exit once the appropriate time to do so comes.
"If the time comes, we're quite capable technically to gradually and stably adjust interest rates while ensuring markets remain stable," Amamiya said.
"We're studying what means we have, how they could be used and how (adjustments in rates) could affect the BOJ's profits," he added.
After three years of heavy asset buying failed to fire up inflation, the BOJ revamped its policy framework in 2016 to one targeting interest rates from the pace of money printing.
It now guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent, while allowing its bond purchases to slow significantly.
Some lawmakers and policymakers have voiced concerns over the rising cost of the BOJ's massive stimulus programme, such as the hit to bank profits from years of near-zero rates. (Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Chris Gallagher and Sam Holmes)