* BOJ deputy gov says yen rise may drive down consumer prices
* BOJ seen still biased towards easing
* Currency tensions rise ahead of G20 ministers' meeting
(Adds details, background)
By Rie Ishiguro
HIROSHIMA, Japan, Oct 20 (Reuters) - The yen's rise is a major negative for Japan's economy, Bank of Japan Deputy Governor Kiyohiko Nishimura said on Wednesday, highlighting worries about yen strength as currency tensions look set to dominate a Group of 20 finance ministers' meeting later this week.
"The fact that the recent yen appreciation is causing a deterioration of business sentiment is a big factor in putting downward pressure on economic activity," Nishimura said in a speech to business leaders in Hiroshima in western Japan.
He also suggested the strong yen may prolong Japanese deflation.
"There is a risk that the yen's appreciation will lower consumer prices not only through worsening economic activity but also through changes in import prices."
The dollar slipped to a 15-year trough below 81 yen late last week. Japan intervened in foreign exchange markets in September to try to curb gains in its currency which policymakers fear could stifle export growth.
"The BOJ, no doubt, is biased towards further easing," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
"Countries cannot openly say they favour a weak currency but many are putting their own interests ahead of others. If developed economies continue to ease policy, this could once more cause bubbles to start forming," Adachi said.
CAPITAL FLOWS
BOJ Governor Masaaki Shirakawa said in a newspaper interview that the BOJ would consider expanding its new asset-buying programme if the economy worsens further.
Group of 20 finance ministers meeting in South Korea on Friday will grapple with the global currency system as developed and emerging countries trade barbs over competitive devaluations.
Nishimura also said capital flows into emerging economies may cause overheating as many countries have not taken sufficient tightening steps.
Asian currencies are appreciating as low yields in developed countries drive capital into the region, fanning fears of inflation.
The People's Bank of China surprised markets on Tuesday with its first interest rate rise in nearly three years in a bid to put a lid on inflation.
Despite a bounce as high as 81.92 yen after China's rate hike, analysts expect any dollar rebound to prove short-lived due to widespread expectations that the U.S. Federal Reserve will print billions of dollars to try to lift the U.S. economy.
The BOJ will hold its next policy meeting on Oct. 28, when it will also release its twice-yearly outlook report on growth and prices.
Some analysts say the bank will likely revise down its consumer price index forecast for the 2011/12 April-March fiscal year to a negative figure from a rise of 0.1 percent, and thus heighten expectations that the bank will keep rates near zero for a long time.
The BOJ surprised markets on Oct. 5 by cutting interest rates and pledging to buy 5 trillion yen ($61 billion) worth of assets to pump more money into the flagging economy.
On Tuesday, Japan's government cut its view on the economy for the first time since February 2009, saying it was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.
Nishimura, a former university professor, has voted with the board and stuck to the BOJ's official line on policy. ($1=81.61 Yen) (Reporting by Rie Ishiguro; Editing by Edmund Klamann)