The Bank of Japan held firm in the face of political pressure to take bold steps to boost the economy, defending its independence and dismissing the policy prescriptions of the main opposition leader, who is expected to become premier next month.
It left policy unchanged, having increasing the size of an asset buying and loans program in September and October to ¥91-trillion ($1.1-trillion U.S.), but analysts see a good chance of fresh stimulus in December to shore up an economy widely seen as in recession.
The central bank has been pushed by Shinzo Abe, leader of the Liberal Democratic Party, to the centre of economic debate ahead of a Dec. 16 national election that surveys show his party would win, signalling his government would put the bank under much greater pressure to ease policy.
But BOJ Governor Masaaki Shirakawa dismissed many of Mr. Abe's proposals, including the possible revision of the Bank of Japan law, a step critics say is aimed at clipping the central bank's independence and forcing it to print money to finance public debt that is already double the size of Japan's economy.
"Central bank independence is a system created upon bitter lessons learned from the long economic and financial history in Japan and overseas countries," Mr. Shirakawa told a news conference.
"Any debate on revising something like the BOJ Law, which lays the foundations of Japan's economic and financial system, must be done carefully, spending a good amount of time."
Mr. Abe is not alone in trying to pressure the BOJ to do more to lift the economy. The government has been calling for action too and in a rare move has sent Economics Minister Seiji Maehara to the last three BOJ meetings.
Still, Mr. Abe has called for more extreme action from the monetary authority, including "unlimited easing", pushing rates below zero, directly underwriting bonds issued to fund public works, and setting an inflation target as high as 3 per cent – comments in the past week that drove the yen to a near seven-month low against the dollar.
"Seeking 3 per cent inflation would be unrealistic and in fact would have a big negative impact on the economy," Mr. Shirakawa said, a rare direct response from a governor who usually chooses his words very carefully.
By holding off from increasing its economic stimulus, the BOJ has given itself time to size up the policies of a new government to be formed after the December vote for the powerful Lower House.
It will also allow it to assess the impact of its September and October policy easing before its next review on Dec 19-20, just after the election.
"The pressure on the BOJ is so strong that I don't think they can avoid easing next month after the results of the election," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
"Increasing asset purchases is the most obvious option."
Japan's economy shrank 0.9 per cent in the September quarter and given headwinds to growth in the current quarter, including a boycott of some Japanese goods in China following a territorial row between the two countries, is widely expected to have slipped into a recession.
The BOJ maintained an assessment that the economy is weakening somewhat but warned that the persistent overseas slowdown was weighing on exports, output and business spending.
It also offered a slightly bleaker view on the outlook, saying the economy will "remain weak for the time being" before resuming a moderate recovery. In October, it had said economic growth will remain flat for the time being.
Mr. Shirakawa was adamant the central bank would not directly underwrite government debt because bond yields would spike and hurt the economy.
"No advanced country has adopted such a policy," he said.
But feeling the political heat, the BOJ is weighing options beyond its asset-buying program, sources say.
The BOJ set a 1 per cent inflation target in February and has eased policy four times so far this year.
Despite Mr. Shirakawa's staunch defence of the central bank's independence, his five-year term ends in April and that of his two deputies in March, opening the way for Abe as presumed prime minister to get the upper hand in setting the tone of BOJ policy.
Under current law, the BOJ is free to set monetary policy but the government nominates the governor, deputy governors and board members, subject to parliament approval.
Government pressure has frequently driven the central bank into easing policy, particularly when a rise in the yen raised calls for measures to ease the impact of the stronger currency on the export-reliant economy.
While Mr. Abe's remarks have helped lift Tokyo share prices on expectations of bolder monetary stimulus, some analysts say his demands are unrealistic and they doubt whether he will stick to them once in power.
Many economists also warn that threatening central bank independence or forcing it to underwrite public debt could trigger an unwelcome spike in bond yields by raising doubts in markets about Japan's ability to keep its fiscal house in order, especially when ratings agencies are already warning the government is doing too little to reduce its debt.
Prime Minister Yoshihiko Noda was quoted by Japanese media as saying he was opposed to forcing the BOJ to underwrite public debt or revising the central bank law, which would go against Japan's fiscal reform efforts.
Either way, the BOJ has a dilemma.
"It would not be ideal for the BOJ to comply completely with politicians' demands, but the central bank cannot ignore them either," said Koichi Haji, chief economist at NLI Research Institute in Tokyo.
"So the next BOJ governor will need the ability to balance the central bank's independence and communicate well with politicians."