BOJ on hold, keeps powder dry as Europe clouds darken By Leika Kihara and Rie Ishiguro TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Wednesday, saving ammunition for later in case Europe's deepening debt crisis warrants further supportive action to shield the fragile economy. But it warned of risks to Japan's recovery prospects, such as strong uncertainty over the global economy and market strains over Europe's sovereign debt crisis, in a sign it stands ready to act again soon should markets destabilize and trigger a renewed spike in the yen. "Global financial markets have been jittery recently due to Europe's debt problems, so we must monitor developments carefully for now," the BOJ said in a statement issued after the meeting. Fears of a Greek exit from the euro zone and funding strains in Spain have kept Japanese central bankers on edge as they fret about the damage the relentless yen gains and slumping Tokyo share prices could inflict on the export-reliant economy. In a sign that support from global growth remains wobbly, the country's exports rose just 7.9 percent in April from a year earlier, slower than a median forecast of 12.7 percent due to falling shipments to China. "The BOJ stood pat as expected but is likely to ease next in July, based on recent patterns," said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo. Japan is likely finding it more difficult than before to intervene in the currency market given international pressure, so if the yen spikes to around 77 to the dollar, the BOJ may act first through monetary policy to weaken the yen. As widely expected, it kept the size of its asset buying program unchanged at 40 trillion yen ($504 billion) and maintained its policy rate at a range of zero to 0.1 percent. While the BOJ is ready to loosen policy again on any signs that Japan's recovery is under threat, it had good reason to keep policy on hold now and save its limited options for later. Japan's economy rebounded in the first quarter from last year's stagnation and is seen headed for a recovery due to spending for rebuilding from last year's earthquake, making it difficult to justify easing now. The BOJ is also struggling to force-feed funds to markets already awash with cash, failing to meet its target for government bond buying twice last week. Any future easing will likely take the form of a further increase in the asset buying program. In doing so, the BOJ may have to target bonds with longer durations to draw enough bids for its bond buying auctions. That is something the central bank wants to put off for as long as possible as it would bind its policy for longer than it prefers and make an exit from ultra-easy policy more difficult. Even if the BOJ refrains from easing at its next review in June, many analysts expect it to ponder easing in July when it issues revised quarterly economic and price forecasts that may show Japan is still distant from achieving 1 percent inflation. The BOJ eased policy via an increase in asset purchases in February and April in a largely symbolic move aimed at showing impatient politicians and markets its determination to achieve its 1 percent inflation target set in February. $1 = 79.3500 Japanese yen Additional reporting by Stanley White, Tetsushi Kajimoto and Kaori Kaneko; Editing by Sanjeev Miglani and Ramya Venugopal