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Tokyo - The Bank of Japan on Thursday warned of the pressures facing a nation reeling from its biggest recorded earthquake, a tsunami and a nuclear crisis, as it bolstered funding for quake-hit areas.
It left its key rate unchanged at between zero and 0.1% and downgraded its view of the economy due to last month's disasters, which have plunged the nation into its worst crisis since World War II.
"Japan's economy is under strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster," the central bank said.
"The earthquake has sharply dampened production in some areas by damaging production facilities, disrupting the supply chain, and constraining electric power supply."
The BoJ unveiled a ¥1.0 trillion scheme to keep banks in affected areas sufficiently funded.
The programme offers cheap one-year loans at 0.1% interest to ensure that financial institutions in disaster-hit areas can meet demand for post-quake reconstruction funding, the bank said in a statement.
It also said it would consider broadening the range of eligible collateral for money market operations to ease the burden of banks in affected regions.
Japan's biggest companies are still trying to gauge the full impact of the March 11 disasters which have left at least 28 000 dead or missing.
The damage crippled supply chains and led to power outages that have forced the likes of Toyota, Honda and Sony to shutter plants.
Output overseas has also been compromised, with a shortage of key components sending shockwaves through global markets.
However, analysts saw the BoJ's move as a small step with limited economic benefits, which suggested it was holding back in anticipation of the need for more dramatic action later.
"It's just a very small amount," said Christian Carrillo, senior rates strategist at Societe Generale.
"It's not something that's like really expanding purchases of Japanese Government Bonds so the government could directly spend more money in the economy, and it's not clear that it can be used very quickly."
In the immediate aftermath of the earthquake, the BoJ injected a record amount of cash into the banking system and doubled its asset purchase fund to ¥10 trillion, a key policy tool it kept unchanged on Thursday.
The total cost from collapsed or damaged houses, factories and infrastructure such as roads and bridges is estimated at ¥16 - ¥25 trillion over the next three fiscal years, according to the Cabinet Office.
The upper estimate would put the disaster's financial impact at more than double the ¥9.6 trillion of the 1995 Kobe earthquake, which killed more than 6 400 people.
The estimate does not account for wider issues such as how radiation from the stricken Fukushima nuclear plant will affect food and water supply, amid an ongoing food scare.
Many see Japan sliding into recession as a result of the impact of the disasters. The BoJ's Tankan survey on Monday showed Japanese business confidence in the outlook for the next three months had plunged.
Manufacturing activity fell to its lowest reading for two years following the twin disaster, a survey by a private research firm showed last week.
And domestic sales of new cars, trucks and buses dropped 37% from a year earlier last month, as production and supplies to auto dealers were hit.
"The initial blow to economic activity will be even larger than first feared", said Capital Economics in a research note.
"The news on Japan's economy is likely to get worse before it gets better."
The consultancy expects Japan's GDP to fall outright by 1.5% this calendar year and by 1% in the fiscal year from April to March.
