The Bank of Japan kept its policy settings unchanged on Wednesday, saving up its scant ammunition for later, while the yen stabilized in the wake of Switzerland's radical action to curb its soaring currency.
But growing uncertainty over the global outlook and the Swiss move to set a ceiling for its currency against the euro keeps pressure on the Japanese central bank to take further action in coming months to prevent a renewed yen spike from derailing a fragile economic recovery.
Governor Masaaki Shirakawa said the BOJ should be mindful of heightening global economic uncertainty and the potential harm the stubbornly strong yen could have on corporate morale, signalling his readiness to ease policy again to support growth.
But he countered criticism that the BOJ was not doing enough compared with its U.S. and European counterparts, ahead of his visit to France for a weekend Group of Seven gathering where the need for further monetary stimulus may be discussed.
"We eased monetary policy at last month's rate review because we thought we needed to be mindful of downside risks. We acted pre-emptively taking into account various uncertainties," Mr. Shirakawa told a news conference.
"We don't feel that we didn't do anything today. Instead, we feel that we are proceeding with powerful monetary easing."
As expected, the BOJ kept its policy rate at a range of zero to 0.1 per cent by a unanimous vote and held off on additional monetary easing steps.
The decision sparked a brief yen rally against the dollar on disappointment by some market players who had bet the BOJ would follow Switzerland with measures to counter yen rises.
The central bank maintained its view that Japan's economy will resume a moderate recovery later this year with growth picking up on increases in output and exports.
It also stressed that core consumer inflation will remain near zero for the time being and reassured markets that it will keep rates virtually at zero until price stability is foreseen.
"As the BOJ clearly sees the economy picking up steadily, the central bank doesn't see a need to take immediate action," said Junko Nishioka, chief Japan economist at RBS Securities.PRESSURE ON BOJ
Switzerland's move on Tuesday to set a ceiling for the soaring franc's exchange rate raised the possibility that some of the safe-haven inflows into the Swiss currency could shift to the yen , driving it again towards record highs.
That would pressure the BOJ to loosen policy further.
The BOJ had already eased policy last month by adding a further ¥10-trillion ($130-billion U.S.) to its pool of funds for asset buying and fixed-rate market operations. Any future easing would take the form of further increases in the scheme.
"The BOJ probably opted to wait until they see how this month's FOMC affects markets and until the new government sets the tone on what it wants from the BOJ," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"But the bank could prove to be too late in its action as the yen is prone to resume rises after the Swiss National Bank's decision."
The BOJ has plenty of reasons to save up ammunition for later. The European Central Bank may signal halting its rate tightening cycle at a meeting on Thursday while the Federal Reserve is seen adding monetary stimulus on Sept. 20-21, which could again weaken the dollar.
There is also no guarantee that easing now would stave off political pressure for more action in October, when debate on how to pay for post-quake reconstruction starts in earnest under new premier Yoshihiko Noda.
Growing fears that the world economy may slip back into recession are piling pressure on G7 finance chiefs, who gather in Marseilles on Friday. The discussion is expected to centre on whether there was wiggle room to ease up on austerity drives in some rich economies while boosting monetary stimulus.
But with monetary conditions already ultra-loose and its huge public debt limiting room for fiscal stimulus, Japan is left with few options to bolster an export-reliant economy vulnerable to sharp rises in the yen.
Mr. Shirakawa said there were limits to what more advanced nations could do in terms of fiscal and monetary stimulus, and warned of the drawbacks to keeping ultra-low rates for too long such as sowing the seeds of another asset bubble.
"Monetary policy may be able to ease the pain from balance sheet adjustments. But the adjustment from past excesses itself will not disappear," he said, calling for the need for patient reforms to fix structural problems plaguing each economy.