TOKYO (Reuters) –- The Bank of Japan forecast emerging markets would help the economy grow 2.6 percent this fiscal year, its fastest pace in a decade, but it warned that Europe's debt woes now posed an increased risk to the outlook.

It kept rates on hold at 0.1 percent and reiterated it would maintain a very loose monetary policy to beat stubborn deflation and support a still-fragile economic recovery.

Analysts say the BOJ could ease policy further if risks to the recovery emerge, such as another sharp rise in the value of the yen, and prompt renewed pressure from a government whose fiscal hands are tied to do more to support the economy.

"The latest growth forecasts suggest that the BOJ will stand pat on policy in the near future, but this outlook could easily change as the government may exert pressure on the bank for further easing due to the tight fiscal conditions," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance.