The central bank is keeping a wary eye on developments in Europe with some not ruling out the potential risk of a Lehman style crisis that could knock Japan back into recession. But with the chance of this happening slim for now, the BoJ will save its limited options betting that public spending on reconstruction from the March 11 earthquake and tsunami will help the economy weather the global slowdown. Here are possible outcomes from its Jan. 23-24 meeting: CUTS GROWTH FORECASTS, POLICY ON HOLD POSSIBILITY: HIGHLY LIKELY The BoJ is aware of the pain the euro's weakness inflicts on exporters, but does not see it as a reason to ease now with the yen largely stable against the dollar -- the main settlement currency for Japanese trade. Despite heightening risks to the outlook, it is clinging to the view that Japan's economy will recover moderately this year as fiscal spending for post-quake reconstruction and firm private consumption offset some of the weakness in overseas demand. That means the BoJ can save its ammunition for now. In a quarterly review of its long-term projections, the BoJ is seen cutting its economic forecast for the fiscal year ending in March to a mild contraction from a 0.3 percent rise. It may also cut its forecast for the next fiscal year from the 2.2 percent projection made in October, more in line with private-sector forecasts of growth below 2 percent, reflecting the effect of the global slowdown. Its forecasts of near-zero consumer inflation will remain largely unchanged. The BoJ releases its long-term growth and price forecasts in a twice-yearly outlook report in April and October, and reviews them in January and July of each year. MARKET REACTION: No significant moves in bond yields or the yen. EASE POLICY BY BOOSTING ASSET PURCHASES POSSIBILITY: UNLIKELY BoJ board members expect Japan's economy to recover this year but disagree on the timing of the rebound. While some see it in spring, others feel it will have to wait until well into autumn as Japan's key export destinations, such as China, feel the pinch from slowing global demand. Pessimists argue that risks to Japan's recovery have heightened in the past few months mainly due to Europe's debt crisis, and so may call for immediate action. But they are a minority for now and it would take a renewed yen spike, not just against the euro but against the dollar, or sharp falls in Tokyo share prices for the BoJ to ease now. Even if it does not act, the central bank would stick to its assessment that growth was stalling near-term and might escalate its warning on heightening risks from Europe's debt crisis, keeping alive market expectations of further monetary easing. If the BoJ were to ease policy, the most likely step would be to top up its 55 trillion yen ($716 billion) asset buying scheme, under which it buys government and private debt and other assets. MARKET REACTION: Bond yields and the yen may briefly fall but the reaction would be short-lived as many in the markets have factored in further easing sometime early this year. EASE POLICY WITH MORE AGGRESSIVE STEPS POSSIBILITY: HIGHLY UNLIKELY The first line of defense would be to flood markets with liquidity via market operations. It might then buy government and corporate bonds more aggressively -- possibly by targeting those with longer dates until maturity under the asset buying scheme. But these are not immediate options and the central bank would resort to such steps only in the case of a severe market shock. MARKET REACTION: The surprise move would knock down bond yields and the yen.