TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Thursday and revised up its assessment of the economy, as recent falls in the yen and signs of a pick-up in global growth give it some breathing space after it expanded stimulus just a month ago.
As widely expected, the central bank held off on further increases to its asset-buying and lending programme and maintained its key policy rate at a range of zero to 0.1 percent.
"Japan's economy appears to be bottoming out," the central bank said in a statement announcing the decision, offering a slightly more upbeat view than last month when it said the economy was weakening.
Fourth-quarter GDP data released earlier in the day showed the economy unexpectedly contracted for the third consecutive quarter, extending a mild recession, but more recent sentiment surveys and leading indicators such as machinery orders point to a recovery.
In a surprise move, BOJ board member Ryuzo Miyao proposed pledging to keep interest rates virtually at zero until 2 percent inflation is in sight. It was turned down by a 8-1 vote.
At present, the BOJ pledges to continue its zero-rate policy and asset purchases "until deemed necessary," making the timeframe for these measures intentionally vague to leave itself flexibility on when and how to end them.
Miyao's proposal is likely aimed at clarifying that the BOJ's zero-rate policy is directly pegged to its new 2 percent inflation target.
The yen had slumped nearly 20 percent against the dollar since November (Xetra: A0Z24E - news) , picking up speed as Japan's new government put relentless pressure on the BOJ to launch more aggressive policy easing.
The hefty slide in the currency has offered some relief to Japan's export-reliant economy, but fanned global fears of competitive devaluations or even a currency war if other countries step in to help their exporters remain competitive.
The BOJ doubled its inflation target to 2 percent in January and made an open-ended commitment to buy assets from next year. That was its fourth monetary expansion in five months, taken largely in response to Prime Minister Shinzo Abe's persistent calls for bolder action to beat deflation.
Abe, who has power to fill three top BOJ posts opening up when Shirakawa and his two deputies leave on March 19, is keeping up pressure on the BOJ to revive the fragile economy.
But the central bank may prefer to hold off on expanding stimulus in March and wait until the first rate review under a new BOJ governor, scheduled for April 3-4, to save its limited policy options, some analysts say.
Expectations that Shirakawa's successor will drive the BOJ into more unorthodox easing steps, such as scrapping a 0.1 percent floor the bank sets on money market rates, have nudged two- and five-year bond yields to record lows last week.
(Additional reporting by Stanley White; Editing by Kim Coghill)