UPDATE 3-BOJ lifts next year's growth forecast, saves ammunition as virus risks linger

* Board keeps rate targets unchanged

* BOJ says economy 'picking up as a trend'

* Quarterly report warns of hit to services spending from crisis

* BOJ Kuroda says no immediate risk of return to deflation (Adds Kuroda quotes in paragraph 3)

By Leika Kihara and Kaori Kaneko

TOKYO, Jan 21 (Reuters) - The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but it warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

Policymakers, however, signaled they have delivered sufficient stimulus for now to cushion the blow from the COVID-19 pandemic.

"I don't think the risk of Japan sliding back into deflation is high. But potential growth may be falling so we need to look at the impact (on prices) carefully," BOJ Governor Haruhiko Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term rates and around 0% for 10-year bond yields.

Deputy Governor Masayoshi Amamiya was absent from the meeting because he stayed home as a precaution after a relative took a PCR test for the coronavirus, the BOJ said.

In fresh quarterly projections, the BOJ upgraded next fiscal year's growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government's huge spending package will soften the blow from the pandemic.

It also upgraded its assessment on capital expenditure to say it was bottoming out, and projected exports to increase broadly thanks to robust overseas demand.

But it offered a bleaker view on consumption, warning that services spending will remain under "strong downward pressure" and could add deflationary impulse to the economy.

"Japan's economy is picking up as a trend," the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was "picking up."

Many analysts had expected the BOJ to hold fire ahead of the bank's review of its policy tools scheduled in March, which aims to make them more sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

"There is a high possibility the BOJ will slow its ETF buying," said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting.

"But the BOJ will do so in a way that doesn't give markets the impression it is dialling back stimulus," he said. (Reporting by Leika Kihara and Kaori Kaneko, additional reporting by Tetsushi Kajimoto; Editing by Simon Cameron-Moore & Shri Navaratnam)