LONDON Wed Feb 11, 2015 11:51am EST

Japan's economy is likely to keep recovering at a modest pace, Bank of Japan policymaker Takehiro Sato said on Wednesday, but he said any doubts about the government's fiscal policy could dampen the impact of central bank stimulus.

Sato, one of four BOJ board members who have opposed the bank's 80 trillion yen ($665 billion) a year stimulus drive, said the biggest risk to Japan was that investors might demand a higher premium to hold its huge stockpile of government debt.

However, he said the country was continuing to see its economy slowly pick up.

"Japan's economy has continued to recovery moderately," Sato said at a Japanese securities conference in London. "I expect it to continue its moderate recovery trend."

He also said the effects of the BOJ's 'quantitative and qualitative easing' (QQE) stimulus program had been increasing but that its impact would be "dampened" if financial markets began to question the fiscal policy of the government.

Tokyo already has the highest debt to GDP ratio of any major economy and the bond market has been hit by some volatility in recent weeks, taking 10-year yields JP10YTN=JBTC to a two-month high earlier this week.

Senior finance ministry official Makato Fujishiro told the conference that this volatility was a concern, but one that should dissipate once more auctions were held.

Sato said that the BOJ's bond purchases had led it to almost monopolize the bond market, buying almost as much debt as is issued each month, and that some market participants were "grumbling" about this.

Sato said the biggest threat to Japan was that investors might demand a higher risk premium for its government debt. Longer-dated yields were at risk of rising sharply as inflation neared the BOJ's 2 percent target and investors braced for an end to BOJ bond purchases, he added.

"The long-term interest rate is likely to rise quite quickly," he said.