By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is ready to deploy monetary policy tools if a financial crisis threatens to destabilize the country's banking system, its deputy governor Masayoshi Amamiya said on Wednesday.
Amamiya said the BOJ will learn from the lessons of Japan's asset-inflated bubble economy in the late 1980s, which burst several years later and led to two decades of economic stagnation and deflation.
"One of the factors that led to Japan's asset-inflated bubble was the fact we kept monetary policy easy even as the economy continued to expand," Amamiya said in parliament.
"The BOJ must be mindful of the potential risks to the economy and prices, including financial imbalances," he said.
As a lender of last resort, the BOJ is ready to pump funds via market operations, Amamiya said.
"In terms of monetary policy, we're ready to respond if financial problems have a big impact on the economy."
The BOJ faces a dilemma. Years of heavy money printing have dried up market liquidity and hurt commercial banks' profits, highlighting the rising risks of prolonged easing.
And yet, subdued inflation has left the BOJ well behind its U.S. and European counterparts in dialing back crisis-mode policies, and with a dearth of ammunition to battle any abrupt yen spike that could derail an export-driven economic recovery.
(Editing by Jacqueline Wong)