* BOJ scrutinising effect of past easing - Yamaguchi * Says BOJ ready to act if shock event derails recovery * Sticks to view Japan headed for recovery, warns of risks * Signals readiness to ponder new policy options By Leika Kihara HIROSHIMA, Japan, July 25 (Reuters) - The Bank of Japan will ease monetary policy further if yen rises threaten the economy's recovery, a deputy governor said, signalling the bank's growing alarm over the potential pain from recent yen gains and Europe's deepening debt crisis. Hirohide Yamaguchi also said the central bank may consider new policy steps that could better support the economy, although he did not elaborate. "If you ask that topping up the BOJ's asset-buying programme further may have become meaningless (in supporting the economy), I would say that the BOJ will continue to pursue whatever steps that may be deemed as more effective," he told a news conference after meeting with business leaders in Hiroshima, western Japan. The remarks came after two new members of the BOJ's policy board said on Tuesday that policymakers should be prepared to take bolder steps to end deflation, a sign the central bank stands ready to offer additional stimulus to the export-reliant economy should a yen spike and overseas slowdown hurt growth. Yamaguchi stuck to the BOJ's view that Japan's economy is headed for a moderate recovery as robust domestic demand, driven by reconstruction spending from last year's earthquake, makes up for weakness in exports. But he warned that with the outlook for overseas demand highly uncertain, the BOJ must be vigilant to the risk that a stronger currency could hurt exports and business sentiment. "If we conclude that yen rises severely threaten Japan's recovery path, or that such risks have heightened sharply, we will implement additional monetary easing steps," he said. Yamaguchi, however, stressed that the decision on whether to ease further was not imminent, and that yen rises alone will not automatically trigger additional stimulus. "What's important is to carefully scrutinise how the yen's rise affects Japan's economy," he said in Hiroshima, home to major automaker Mazda Motor Corp. While few analysts expect the central bank to expand monetary stimulus in August, Yamaguchi's remarks may heighten expectations that a spike in the yen or worsening developments in Europe could force it into action in coming months. "Our main scenario is that the BOJ will ease further by expanding its asset purchase programme in October when it cuts economic projections in its twice-yearly outlook report," said Junko Nishioka, chief Japan economist at RBS Securities. "But further easing could come sooner if Europe's crisis accelerates safe-haven fund flows to trigger a sudden spike in the yen and a decline in share prices, dampening sentiment." NEW STEPS AHEAD? The BOJ set a 1 percent inflation target and eased policy via an increase in asset purchases in February. It followed up with another easing in April to show its resolve to beat deflation. The central bank has stood pat since then and has stressed that it will only act again if risks to the economy heighten sharply enough to derail its forecast of a moderate recovery. Many in the BOJ will probably want to save its ammunition again at the next policy meeting on Aug. 8-9, although renewed yen rises, fanned by market jitters over the euro, are putting pressure on the bank to help exporters. Yamaguchi said the BOJ is still studying the effect of its easing in February and April, which will broaden over time as it purchases assets to meet the existing 70 trillion yen ($895 billion) target under its asset buying and loan programme. "But of course if some kind of shock leads to the economy undershooting our forecast or heightens risks to the outlook sharply, we won't hesitate to ease policy further," he said. With interest rates virtually at zero and companies hesitant to borrow money for investment, the BOJ has been struggling to force-feed money to markets already awash with excess cash. The central bank's asset-buying programme aims to nudge down borrowing costs but with two-year yields stuck at 0.1 percent and five-year yields near 0.2 percent, critics say the bank may need to ponder other tools to help the economy. Takehiro Sato, one of the new BOJ board members, said on Tuesday that purchasing foreign bonds could be one option as long as the central bank made it clear that it is providing liquidity and not trying to manipulate currencies. Yamaguchi, however, was cautious about the idea, saying that doing so would be considered as an attempt to weaken the yen and would breach the finance ministry's jurisdiction over currency policy. Japan's economy is expected to outperform most other developed nations this year thanks to solid domestic demand, but analysts have slashed forecasts for factory output as the slowdown in external markets becomes more pronounced. Exports fell in June from a year earlier, the first decline in four months, data showed on Wednesday, hurt by the slowdown in Europe, China and other markets. Yamaguchi, a key figure to watch for clues on the future direction of monetary policy, is considered as among board members more eager to ease pre-emptively to support the economy.