Interview: IMF's Furusawa sees BOJ taking back seat in next Japan recession

By Leika Kihara

NUSA DUA, Indonesia (Reuters) - Fiscal policy will likely play a bigger role in spurring growth when Japan is hit by a next recession, as the Bank of Japan's ultra-easy policy is already in full swing, International Monetary Fund Deputy Managing Director Mitsuhiro Furusawa said.

Furusawa, who oversees Asian economies at the IMF, said on Thursday it was premature for the BOJ to whittle down stimulus with inflation distant from its 2 percent target.

But he also said the BOJ will likely take a back seat when the economy faces a downturn as Japan was "already doing quite a lot on monetary policy."

"It's important that Japan proceeds with next year's scheduled sales tax and lay out a credible medium- to long-term fiscal plan," so it has scope to deploy fiscal spending to deal with future shocks to the economy, Furusawa told Reuters.

Furusawa countered views, held by some analysts, that the BOJ should start normalising policy soon, so it can prepare tools to ramp up stimulus when growth sputters.

"I don't think Japan is at a stage where the central bank should change monetary policy and raise interest rates, or diminish the degree of monetary stimulus," he said.

Subdued inflation has forced the BOJ to maintain its massive stimulus programme despite the rising cost of prolonged easing, such as the hit to bank profits from years of near-zero rates.

Reflecting concerns over the rising cost of stimulus, the BOJ took steps in July to make its policy framework more lasting.

"It's becoming a long-term battle, so the BOJ's policy framework needs to be sustainable," Furusawa said.

"The BOJ is taking various steps for this purpose, including the measures it took in July," he said, shrugging off the view its ultra-easy policy was nearing a limit.

Furusawa played down the risk that China could struggle to contain capital outflows, a concern that is drawing attention among policy-makers gathering in Bali for the IMF meetings.

"China has various means to deal with the situation, so we think this is manageable," he said.

On the recent market rout, Furusawa said volatility was heightening due partly to years of heavy money printing by major central banks.

"There's huge amount of money circulating in the global economy and that may be heightening volatility, as well as recent topics like trade," he said.

"We shouldn't fret about day-to-day market moves, but we should look carefully at how the recent market moves could affect Asian economies."

(Reporting by Leika Kihara; Editing by Simon Cameron-Moore)