The Bank of Japan (BOJ) kept monetary policy steady on Thursday but signaled the chance of expanding stimulus as early as its next policy meeting in October by issuing a stronger warning over the risks threatening the economy.

As expected, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0% under its yield curve control (YCC) policy.

Announcing its decision, the central bank said in a statement that it was becoming necessary to pay “closer attention” to the chance that the economy will lose sufficient momentum to achieve the BOJ’s 2% inflation target.

“Taking this situation into account, the BOJ will re-examine economic and price developments at its next policy meeting” when it reviews its long-term growth and price forecasts, it said.

Addressing a news conference later, Governor Haruhiko Kuroda said: “I don’t think Japan’s economic outlook is worsening sharply, or that the economy is about to lose momentum for hitting our price goal.”

But he went onto say there were mounting risks surrounding overseas growth, and that was making BOJ policymakers “more eager to act” than when they last met in July.

“I don’t think we need to overhaul our yield curve control framework. If we were to act, we will aim at lowering real interest rates and narrowing risk premia. That can be done by steps we are taking now, such as buying government bonds and exchange-traded funds,” Kuroda said.

“Deepening negative interest rates will be among options if we were to ease further,” he said. “As to what we will do, that will depend on economic conditions at the time.”

The BOJ’s announcement came hours after the US Federal Reserve cut interest rates to sustain a record-long economic expansion and insure against risks such as weak global growth and resurgent trade tensions.

“The BOJ stood pat today as yen moves were steady after the decisions by its US and European peers, giving it some breathing room,” said Yasunari Ueno, chief market economist at Mizuho Securities.

“But the chance of a renewed yen spike remains a source of concern for the BOJ since central banks are now in a competition to ease policy,” he said, adding that the trigger for additional easing would be a yen rise above 100 to the dollar.

The yen rose from a seven-week low versus the dollar and held onto those gains after the BOJ’s decision to keep policy steady for now. The dollar stood around 107.80 yen.

The BOJ’s decision to maintain its interest rate targets was made by a 7-2 vote, with board members Goushi Kataoka and Yutaka Harada dissenting.

While cutting interest rates deeper into negative territory will be the key option when the BOJ next acts, the central bank could accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.

The BOJ next meets for a rate review on Oct.30-31, when it will conduct a quarterly review of its long-term growth and inflation forecasts.

Market expectations of imminent easing grew after the BOJ pledged in July to act “without hesitation” and pre-emptively to fend off risks that could knock the economy off the path toward achieving its elusive 2% inflation target.

The BOJ maintained that pledge in its statement on Thursday, as well as a commitment it has made to keep current ultra-low rates at least until spring next year.

BOJ officials have said solid domestic demand is offsetting some of the weakness in exports, helping to sustain moderate economic expansion.

But waning hopes for a near-term rebound in global growth, and concerns about the impact a domestic sales tax hike in October, have made BOJ policymakers more open to discussing expanding stimulus, sources say.

Exports fell for a ninth straight month in August, while business morale hit the weakest level in 6-1/2 years. Disinflationary pressures are also on the rise again with surveys showing companies have cut selling prices for three straight months in a bid to salvage orders.

Meanwhile, Japanese shares rallied to close in on this year’s peaks on Thursday, with domestic demand-led shares leading gains after a rate cut by the U.S. Federal Reserve helped boost risk sentiment.

The Nikkei share average rose as much as 1.34% to 22,255.56, edging near its year-to-date high of 22,362 hit in late August. It closed up 0.38% at 22,044.45.

The broader Topix gained up to 1.24% to 1,626.52, coming within reach of its Aug.17 peak of 1,633.96. It ended 0.56% higher at 1,615.66.

Reuters