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By Leika Kihara
TOKYO (Reuters) - Japanese households' sentiment worsened in the three months to March and their expectations of inflation fell to levels before the Bank of Japan deployed its massive asset-buying programme three years ago, a central bank survey showed.
The survey's bleaker outlook keeps alive expectations of additional monetary stimulus even as BOJ Governor Haruhiko Kuroda maintained his optimism that the world's third-largest economy was recovering moderately.
Kuroda, however, warned that he was closely watching how a recent surge in the yen and slumping Tokyo stock prices could affect the outlook.
"Global financial markets remain unstable as investors are becoming increasingly risk averse due to uncertainty over the outlook of emerging and resource-exporting economies," Kuroda said in a speech at an annual meeting of trust banks on Monday.
"The BOJ won't hesitate to take additional easing steps if needed to achieve its inflation target," he said.
The BOJ's quarterly survey on people's livelihood showed the ratio of households who expect prices to rise a year from now stood at 75.7 percent in March, down from 77.6 percent in December and the lowest level since March 2013.
Eighty percent of the total number of households surveyed expect inflation to pick up five years from now, down slightly from December, the survey showed on Monday. That level was the lowest since December 2012.
A separate index measuring households' confidence about the economy stood at minus 22.5 in March, worsening from minus 17.3 in December to the lowest level since March 2015.
The gloomy outcome underscores the dilemma the BOJ faces as it battles mounting external headwinds for the economy with its dwindling policy tool-kit.
The BOJ's adoption of a massive asset-buying programme, dubbed "quantitative and qualitative easing," in April 2013 was intended to spur public expectations that prices will rise, and in turn, encouraging households and firms to spend.
That has failed to materialise, forcing the central bank to add negative interest rates to QQE in January in a fresh attempt to accelerate inflation towards its ambitious 2 percent target.
The move has failed to arrest a worrying spike in the yen or boost business confidence, underpinning market expectations the BOJ may top up stimulus in the coming months.
A separate poll by private think tank Japan Center for Economic Research, among the most comprehensive surveys conducted on Japanese analysts, showed 39 of the 44 analysts surveyed projecting that the next BOJ move would be further monetary easing.
Of those forecasting more easing, 13 analysts expect the BOJ to act in April and 14 in July, the poll showed on Monday.
Japan's economy contracted in October-December last year and analysts expect it to post only feeble growth, if any, in January-March. Inflation has also ground to a halt, keeping the BOJ under pressure to ease again in coming months.
(Editing by Jacqueline Wong)