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Tokyo - Japan's central bank on Tuesday kept its key rate unchanged and said it would assess the impact of earlier measures to boost the faltering economy amid fears of a looming slowdown.
The bank's board made the unanimous decision to keep the key rate at between zero and 0.1% after a two-day meeting, warning that a fragile recovery from deep recession was "pausing".
"The bank will continue to carefully examine the outlook for economic activity and prices, and take policy action in an appropriate manner," the BoJ said in a statement released together with the rate announcement.
The decision followed the BoJ's move in October to adopt a near zero rate policy and a five trillion yen ($60bn) asset purchase scheme to lower borrowing costs and help tackle deflation.
The move added to a previous 30 trillion yen scheme to boost liquidity and spur growth.
The central bank has only just begun its programme of asset purchases announced in October that includes government and corporate bonds and riskier exchange traded funds (ETFs) and real estate investment trusts (REITS).
Analysts say the move has contributed to the more positive mood in asset markets generally. Japan's Nikkei index has rebounded above the 10 000 level in recent weeks.
However, several economists expect the central bank to be forced to ease policy further - such as by expanding its new asset-buying facility - early next year, as the economy faces the threat of a slowdown.
Many argue that the planned five trillion yen fund to buy assets such as government bonds, commercial paper and corporate bonds is too small in that it it represents a tiny amount of the total money supply.
Recent rises in Japanese bond yields may also compel it to do more keep borrowing costs low, analysts say.
There also remain challenges of slowing export growth and falling industrial production on weakening overseas demand, while the expiration of government incentives for environmentally friendly cars has also hit demand at home.
"As for private consumption, demand for some goods has suffered a reverse after the sharp increase seen previously", the BOJ warned.
"Production has recently declined slightly and business sentiment has also been somewhat weak, particularly in the manufacturing sector," the central bank said.
Japan, which heavily relies on exports of cars, electronics and machines, has been hit by a strong yen, which makes its goods less competitive abroad and erodes companies' overseas profits when repatriated.
However, the unit has been stable recently after hitting 15-year highs against the dollar, giving some respite to the export sector and easing pressure on the economy.
While the central bank's quarterly Tankan survey of business sentiment last week showed confidence had weakened for the first time in nearly two years, the decline had been less than expected by many economists.
Japan remains mired in crippling deflation, as falling prices prompt consumers to hold off on purchase decisions in the expectation of further price drops, clouding future corporate investment.
The strong yen effectively makes imports cheaper, therefore reinforcing the deflationary cycle.
While the BoJ acknowledged that prices continue to decline on a year-on-year basis "due to the substantial slack in the economy as a whole," it said the pace of decline had continued to slow.
Economic growth in the July-September quarter was earlier this month revised up to an annualised 4.5% thanks to a rush to beat expiring government incentives, but expectations are for a contraction in the fourth quarter.
"GDP will almost certainly fall in the current quarter but we are increasingly concerned that it may drop further in the first three months of 2011 as well, meaning that Japan will technically be in recession again," consultancy Capital Economics said in a recent research note.
