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UPDATE 2-BOJ stands pat, keeps power dry as recession risk looms

* BOJ holds off on expanding asset-buying programme

* BOJ seen under pressure to ease at Oct. 30 meeting

* Economics minister makes rare appearance, pressures BOJ

* Comments from governor's briefing seen after 0715 GMT

(Adds analyst quote, new Maehara quotes)

By Leika Kihara

TOKYO, Oct 5 (Reuters) - The Bank of Japan resisted political pressure for action and kept monetary policy steady on Friday, but left the door open to more monetary easing later this month by striking a pessimistic note on the state of the world's third-largest economy.

Despite mounting signs that sagging exports to China and Europe may nudge Japan into recession, central bankers preferred to wait and assess the effect of stimulus unveiled just last month and save their limited options for now.

Underscoring heightening pressure from the government, newly appointed Economics Minister Seiji Maehara, a vocal advocate of aggressive monetary expansion, made a rare appearance at Friday's meeting to make a direct call for bolder action.

"I'd like to continue urging the BOJ to pursue powerful monetary easing to achieve its price target," Maehara told reporters after attending the rate review, becoming the first economics minister to do so in nearly a decade.

As widely expected, the central bank held off on expanding its asset buying and loan programme, after having increased it just last month on fears that weak exports and output are diminishing prospects of a near-term recovery.

But it warned that the global economy was moving deeper into deceleration and hurting Japanese business sentiment, keeping alive expectations that it may ease at its next policy-setting meeting on Oct. 30.

"Japan's economic activity is more or less leveling off," the central bank said in a statement announcing its policy decision. That was a grimmer tone than last month, when it said a pickup in growth was pausing.

Reflecting increasing signs that the economy may slip into a recession, the BOJ is expected to cut its long-term economic and price forecasts due out at the Oct. 30 review, and admit that Japan remains years away from achieving its 1 percent inflation target, say sources familiar with the central bank's thinking.

"Downward pressure on the economy and prices is increasing, so keeping policy on hold at the BOJ's next meeting may not be an option," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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RISKS LOOM

So far this year, Japan's economy has outperformed most of its peers in the Group of Seven on spending for rebuilding from last year's earthquake. But with that effect fading, domestic demand may not make up for falling exports for much longer.

Output fell to a 15-month low in August on sagging sales to top export market China and business sentiment soured in the three months to September, fuelling concerns that the world's third-largest economy has stalled and may slip into recession.

BOJ officials have signalled their readiness to act again should the economy underperform despite September's easing, or if risks heighten enough to threaten Japan's recovery.

Anti-Japan protests in China have added to headaches for Japanese companies. Toyota Motor Corp's

China sales fell about 40 percent in September, underscoring how badly the territorial row is hitting Japanese brands.

Pressure from the government, which has little room to boost fiscal stimulus due to Japan's burgeoning public debt, will keep the central bank on edge.

Two government representatives, one from the finance ministry and another from the Cabinet Office, which Maehara heads, can attend the BOJ's policy meetings. They cannot vote but may express views and propose a request in vote on policy.

While stressing that he respects the BOJ's independence, Maehara said he will continue to attend policy meetings as much as possible to call for efforts to beat deflation.

The BOJ, however, is running out of tools to force-feed cash to markets already awash with excess funds.

It needs to pump 20 trillion yen ($255 billion) more into markets by the end of next year to achieve the 80-trillion-yen target set for its asset buying and loan programme, under which it offers funds via market operations and buys government bonds, corporate debt and trust funds investing in stocks and property.

That is no easy task because commercial banks, struggling to find companies willing to borrow money amid a weakening economy, are in little need of cash and so are piling up the money into their deposits at the central bank.

Maehara has urged the BOJ to buy foreign bonds. But this will require a revision to current law that prohibits the BOJ from buying foreign assets to influence currency rates.

That means the most likely path would be for the central bank to continue boosting government bond purchases, sources have said, adding that there is still room to pledge bigger amounts of bond purchases for next year.

($1 = 78.4500 Japanese yen)

(Additional reporting by Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Editing by Kim Coghill)

((leika.kihara@thomsonreuters.com)(+813-6441-1828)(Reuters

Messaging: leika.kihara.reuters.com@reuters.net))

Keywords: JAPAN ECONOMY/