BOJ Kuroda steps up warning on protectionism as risk to Japan's recovery

By Leika Kihara

WASHINGTON (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the rising tide of protectionism is emerging as a more imminent risk to Japan's economy, issuing his strongest warning to date of the damage trade frictions could inflict on an otherwise solid recovery.

Finance leaders of the Group of 20 major economies will likely engage in "quite comprehensive" debate on trade as escalating frictions could slow global growth, Kuroda said.

"Many countries share the view they benefit greatly from free trade, so I don't think protectionism will spread and lead to a decline in global growth. But the risk is there," Kuroda told reporters on Thursday, upon arrival for a weekend gathering of the G20 finance ministers and central bank governors.

"Protectionism isn't having a huge impact on Japan's economy yet. But the risk is right in front of us, so we need to carefully watch how developments unfold," Kuroda said.

The remarks are the strongest to date by Kuroda, who up till now had said that protectionism was unlikely to spread since the global community understood the importance of free trade.

They also come ahead of the BOJ's rate review next week, where board members are set to keep monetary policy steady and issue fresh quarterly projections on growth and inflation.

Sources have told Reuters the BOJ will likely maintain its view inflation will reach its 2 percent target next fiscal year but warn of uncertainties to the outlook.

Japan's economy expanded an annualized 1.6 percent in the October-December quarter, marking the eighth straight quarter of gains, on robust global demand and capital spending.

But core consumer inflation stood at 1.0 percent in February, well below the BOJ's 2 percent target, as slow wage growth keeps consumers from increasing their spending.

Japanese policymakers fret that the escalating U.S.-Chinese trade frictions could hurt business confidence and slow growth of Japan's export-reliant economy.

(Reporting by Leika Kihara; Editing by Andrea Ricci)