By Tetsushi Kajimoto and Daniel Leussink

TOKYO (Reuters) - The Bank of Japan cut its inflation forecasts on Wednesday and warned of rising risks to the economy from faltering global demand, further pushing back policymakers' years-long efforts to foster durable growth.

As widely expected, the BOJ retained its ultra-easy monetary settings at its policy review, leaving Japan some way off from exiting a sweeping stimulus program begun in 2013.

The central bank also maintained its view that Japan's economy, the world's third largest, will continue to expand at a modest pace. Yet the rising pressure on global growth from a trade war between the United States and China - Japan's biggest trading partners - has many analysts wary about the outlook.

"Japan's economy is likely to continue on an expanding trend through fiscal 2020," the central bank said in its quarterly outlook report.

"Overseas economies are expected to continue growing firmly on the whole, although various developments of late warrant attention such as the trade friction between the United States and China."

The BOJ warned the domestic economy faces risks on several fronts, including protectionism, Brexit and U.S. economic policy.

"Such downside risks concerning overseas economies are likely to be heightening recently, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan," it said.

A Reuters poll of economists showed those external factors have increased the chances of Japan sliding into a recession this coming fiscal year starting in April, making it ever so harder for the BOJ to reach its 2 percent inflation target.

Moreover, the International Monetary Fund (IMF) trimmed its global growth forecasts and a survey showed increasing pessimism among business chiefs amid the trade tensions.

At its policy-setting meeting, the BOJ kept its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.

With stubbornly weak inflation forcing it to retain its massive stimulus longer than expected, the BOJ took steps in July to make some changes to its policy framework, such as allowing bond yields to move more flexibly around its target.

"It will be difficult for the BOJ to discuss policy normalization or an exit strategy for the moment as risks from global economies are rising," said Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute.

"The central bank will likely save easing measures for later and it will examine how the Fed policy movement will be and how it will likely impact the yen," he said.

The global slowdown has prompted the Federal Reserve to take a more cautious stance on its tightening cycle in recent months, with traders speculating it might press the pause button soon having raised rates four times last year.

LOWER INFLATION FORECAST

In its outlook report issued on Wednesday, the BOJ's nine-member board analyzed Japan's economy including fresh growth and inflation projections through the fiscal year ending in March 2021.

The central bank cut its economic growth projections in the current fiscal year to March, but it raised its growth forecasts slightly in the fiscal years 2019 and 2020, with government spending seen to offset the pain of the planned tax hike in October.

In a further sign of the tough road ahead, government data out on Wednesday showed Japan's exports in December fell the most in two years.

The BOJ cut its forecast for core consumer inflation to 0.9 percent in the fiscal year beginning in April from 1.4 percent, reflecting slumping oil prices and the potential fallout from slowing global growth. It was the fourth downward revision by the central bank to its inflation forecast for fiscal 2019 since it was first estimated in April 2017.

That was still above a 0.7 percent forecast by analysts polled by Reuters.

The central bank also trimmed core consumer inflation in fiscal 2020 to 1.4 percent, from 1.5 percent forecast in October.

Many economists in the poll say the BOJ's next move is to start normalizing policy, with its steps likely including expanding its 10-year bond yield fluctuation from 0.2 percent and raising the 10-year yield target from around zero percent.

A majority expect that would happen in 2020 or later.

As part of efforts to prevent financial institutions from sitting on their huge pile of cash, the central bank decided to extend the deadline by one year for lending schemes aimed at encouraging financial institutions to boost loans and support growth foundations .

The BOJ's radical stimulus program has had some unintended consequences, as years of low rates hurt financial institutions' profits.

Many BOJ policymakers are wary of ramping up stimulus, though external shocks or a sudden spike in the yen could force the central bank to do just that if the economy is at risk of sliding into recession.

(Reporting by Tetsushi Kajimoto and Daniel Leussink; Additional reporting by Kaori Kaneko and Kiyoshi Takenaka; Editing by Shri Navaratnam)