The Bank of Japan kept monetary policy unchanged today, saying that while the economy was improving thanks to export-led demand it was "extremely important" for Japan to break free of deflation.
The central bank sounded slightly more optimistic about the economy than in the previous month, tweaking its assessment to say the economy "continued" to pick up and citing improvements in overseas economies among factors supporting growth.
It also noted improving business sentiment after last week's tankan survey showed big firms were far less pessimistic about conditions than three months before.
But analysts said the central bank's focus on risks posed by a continued decline in prices left the door open for further monetary easing.
"The bank's economic assessment shows it is more positive on the economy than it was in January, although the upgrade this month was more modest than some had expected," said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
"This upgrade alone will not dispel speculation about further easing as the bank's policy does not seem to be linked to its economic assessment."
The BOJ last month further eased monetary policy by doubling the size of its fund-supply tool adopted in December, at which it offers loans to commercial banks at the policy rate of 0.1 per cent.
The BOJ likely held fire to save its limited policy options for when government pressure for further easing heightens again.
"No one thinks the Bank of Japan will stand pat in the coming months so monetary policy is seen biased towards further easing," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"The BOJ will likely move if the yen rises again and government pressures mount for the bank to do more to beat deflation."
The government is expected to continue leaning on the BOJ to support a fragile economy.
The next likely step is for the BOJ to further expand its fund-supply tool either by boosting the size again or extending the duration of fixed-rate loans to six months from three months, analysts say.
The BOJ is virtually alone in expanding monetary easing with the Federal Reserve Bank and the European Central Bank gradually unwinding emergency lending measures put in place during the global financial crisis.
Reuters