By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is expected to warn of heightening global risks at its monetary meeting on Tuesday, but will hold off on expanding stimulus to preserve its limited policy options in case a looming U.S. rate hike decision sparks a fresh wave of market volatility.
A run of poor data, including weak exports, feeble wage growth and soft household spending, has ramped up pressure on the BOJ to deploy additional monetary steps to reflate the economy out of a second-quarter contraction.
A shift in the board's composition means if BOJ Governor Haruhiko Kuroda were to pull the trigger, he could count on more votes than last October when his proposal to expand stimulus won by a razor-thin margin.
But many BOJ policymakers are wary of acting now, concerned about the diminishing returns and rising costs of the bank's huge asset buying that is already drying up bond market liquidity.
"I can see how the BOJ would prefer to stand pat...because there's not enough data to scrutinise," Kozo Yamamoto, a close aide to premier Shinzo Abe, told Reuters.
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But Yamamoto said the central bank should ease policy as early as its meeting on Oct. 30, when it is set to cut its rosy long-term economic and price forecasts.
At the two-day meeting ending on Tuesday, the BOJ is widely expected to reiterate its pledge to increase base money at an annual pace of 80 trillion yen ($665 billion).
The central bank is expected to offer a bleaker assessment of overseas economies but maintain its view that Japan's recovery is intact, sources say, clinging to a hope that firms will use their record profits to boost wages.
Japan's economy contracted in April-June and analysts expect only a feeble rebound in the current quarter as China's slowdown hits exports and output. A leading indicator of capital expenditure unexpectedly fell and rises in summer bonuses were disappointingly small.
Whether the U.S. Federal Reserve hikes interest rates at its policy meeting on Thursday is key to when the BOJ may next ease, some analysts say. If the Fed delays a rate hike and that causes the dollar to fall, it may trigger a yen spike and hurt already weak exports by making Japanese goods less competitive overseas, they argue.
(Reporting by Leika Kihara; Editing by Eric Meijer)